THE HANDBOOK OF
COUNTRY RISK 2006–2007
A Guide to International Business and Trade
Publisher’s note Every possible effort has been made to ensure that the information contained in this publication is accurate at the time of going to press and neither the publishers nor any of the authors, editors, contributors or sponsors can accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editors, authors, the publisher or any of the contributors or sponsors. Users and readers of this publication may copy or download portions of the material herein for personal use, and may include portions of this material in internal reports and/or reports to customers, and on an occasional and infrequent basis individual articles from the material, provided that such articles (or portions of articles) are attributed to this publication by name, the individual contributor of the portion used and GMB Publishing Ltd. Users and readers of this publication shall not reproduce, distribute, display, sell, publish, broadcast, repurpose, or circulate the material to any third party, or create new collective works for resale or for redistribution to servers or lists, or reuse any copyrighted component of this work in other works, without the prior written permission of GMB Publishing Ltd. GMB Publishing Ltd. 120 Pentonville Road London N1 9JN United Kingdom www.globalmarketbriefings.com This edition first published 2006 by GMB Publishing Ltd. © GMB Publishing Ltd. and Contributors Hardcopy ISBN 1-846730-12-0
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Contents
■ ACKNOWLEDGEMENTS .........vi ■ FOREWORD ..................................vii 2006: The Year of Squeezed Margins François David, Chairman, Coface
■ INTRODUCTION .........................ix The Outlook for 2006–2007 Jonathan Reuvid, Senior Editor, GMB Publishing
■ THE @RATING SYSTEM .......xviii ■ COUNTRY @RATING DEFINITIONS ...............................xix
■ SECTORAL OVERVIEW ...........xxi Sylvia Greisman, Dominique Fruchter and Caroline Dupuis, Coface Country Risk and Economic Studies Department, Paris
■ OUTLOOK FOR 2006.............xxx
Strong Growth but Risks in Euro Zone Experts from Oxford Analytica, Oxford
■ EUROPE AND THE CIS
Growth in Euro Zone Set to Remain Poor ...................................2 Experts from Oxford Analytica, Oxford
Russian Oil Slowdown Set to Spread...................................5 Experts from Oxford Analytica, London
The Range of Country @ratings in Europe and the CIS ...............................................8 Sylvia Greisman, Jean-Louis Daudier, Dominique Fruchter, Caroline Dupuis and Olivier Oechslin, Coface Country Risk and Economic Studies Department, Paris Albania .................................................13 Armenia ...............................................14 Austria .................................................15 Azerbaijan ............................................17 Belarus .................................................18 Belgium ...............................................19 Bosnia and Herzegovina ....................23 Bulgaria ...............................................24 Croatia .................................................27 Cyprus...................................................30 Czech Republic ....................................31 Denmark ..............................................35 Estonia .................................................37 Finland .................................................40 France ..................................................43 Georgia ................................................47 Germany ..............................................48 Greece ..................................................52 Hungary ...............................................54 Iceland .................................................58 Ireland .................................................59 Italy .......................................................61
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CONTENTS Kazakhstan ..........................................65 Kyrgyzstan ...........................................68 Latvia ...................................................69 Lithuania ..............................................72 Luxembourg .........................................75 Macedonia ...........................................77 Malta.....................................................78 Moldova ...............................................79 The Netherlands .................................80 Norway ................................................83 Poland ..................................................85 Portugal ...............................................89 Romania ..............................................91 Russia ..................................................96 Serbia and Montenegro .......................99 Slovakia ..............................................102 Slovenia .............................................105 Spain ..................................................108 Sweden ..............................................112 Switzerland ........................................114 Tajikistan ............................................118 Turkey .................................................119 Turkmenistan .....................................122 Ukraine ..............................................123 United Kingdom ................................127 Uzbekistan .........................................131
■ THE AMERICAS US Economic Growth Will Moderate ......................136 Experts from Oxford Analytica, Oxford
Chile’s Growth Outlook Remains Strong ...................139 Experts from Oxford Analytica, Oxford
The Range of Country @ratings in the Americas...142
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Sylvia Greisman and Pierre Paganelli, Coface Country Risk and Economic Studies Department, Paris Argentina ...........................................147 Bolivia ................................................151 Brazil .................................................154 Canada ...............................................157
Chile ...................................................160 Colombia ...........................................164 Costa Rica ..........................................167 Cuba ...................................................168 Dominican Republic .........................172 Ecuador .............................................173 El Salvador .........................................176 Guatemala .........................................177 Haiti ...................................................181 Honduras ...........................................182 Jamaica ..............................................183 Mexico ...............................................184 Nicaragua ..........................................187 Panama ..............................................188 Paraguay ............................................189 Peru ...................................................192 United States .....................................195 Uruguay .............................................199 Venezuela ..........................................202
■ ASIA Trade and Consumption Drive China’s Growth.........206 Experts from Oxford Analytica, London
The Range of Country @ratings in Asia .................209 Sylvia Greisman, Yves Zlotowski and Olivier Oechslin, Coface Country Risk and Economic Studies Department, Paris Afghanistan .......................................215 Australia ............................................216 Bangladesh ........................................219 Cambodia ..........................................220 China .................................................221 Hong Kong ........................................225 India ...................................................229 Indonesia ...........................................232 Japan ..................................................236 Laos ...................................................240 Malaysia .............................................242 Mongolia ...........................................245 Nepal .................................................247 New Zealand .....................................248 Pakistan .............................................251
CONTENTS Papua New Guinea ...........................254 Philippines .........................................256 Singapore ..........................................260 South Korea .......................................263 Sri Lanka ............................................266 Taiwan ................................................269 Thailand .............................................273 Vietnam .............................................276
The Range of Country @ratings in Sub-Saharan Africa...........355
■ SUB-SAHARAN AFRICA Political Crises Beset East Africa ............................352
Sylvia Greisman and Bernard Lignereux, Coface Country Risk and Economic Studies Department, Paris Angola ................................................360 Benin ..................................................363 Botswana ...........................................364 Burkina Faso ......................................368 Burundi...............................................369 Cameroon ..........................................370 Cape Verde ........................................373 Central African Republic ...................374 Chad .................................................375 Congo ................................................377 Democratic Republic of Congo .........378 Djibouti...............................................379 Eritrea ................................................380 Ethiopia .............................................381 Gabon ................................................382 Ghana ................................................386 Guinea ...............................................389 Ivory Coast .........................................390 Kenya .................................................394 Madagascar .......................................397 Malawi ...............................................398 Mali ....................................................399 Mauritania .........................................400 Mauritius ...........................................403 Mozambique .....................................407 Namibia .............................................410 Niger ..................................................411 Nigeria ...............................................412 Rwanda ...............................................415 São Tomé and Principe ......................416 Senegal ..............................................417 Sierra Leonne .....................................420 South Africa .......................................421 Sudan .................................................425 Tanzania ............................................426 Togo ...................................................429 Uganda ..............................................430 Zambia ..............................................434 Zimbabwe ..........................................437
Experts from Oxford Analytica, Oxford
Acronym Table and Lexicon ..............440
■ THE MIDDLE EAST AND NORTH AFRICA Oil Price to Stay High on Upside Risks........................282 Experts from Oxford Analytica, London
The Range of Country @ratings in the Middle East and North Africa .........285 Sylvia Greisman and Catherine Monteil, Coface Country Risk and Economic Studies Department, Paris Algeria ................................................291 Bahrain ..............................................295 Egypt ..................................................298 Iran ....................................................302 Iraq .....................................................305 Israel ..................................................306 Jordan ................................................309 Kuwait ................................................313 Lebanon .............................................316 Libya ...................................................320 Morocco ............................................323 Oman .................................................326 Palestinian Territories .......................329 Qatar ..................................................330 Saudi Arabia ......................................333 Syria ...................................................337 Tunisia ...............................................340 United Arab Emirates .......................344 Yemen ................................................347
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Acknowledgements The publisher wishes to thank the Oxford Analytica and Coface country risk and short-term experts (Nathalie Ballage, Jean-Louis Daudier, Caroline Dupuis, Dominique Fruchter, Bernard Lignereux, Catherine Monteil, Olivier Oechslin, Pierre Paganelli, Jean-François Rondest and Yves Zlotowski) who have contributed to The Handbook of Country Risk 2006. Our thanks are also extended to Stanley Glick (Lingua Franca), Govind Bhinder (FEAT – Financial and Economic Authors and Translators) and Coface’s Communications Department.
Neither the Ministry of the Economy, Finance and Industry nor Coface can be held liable in any way for the opinions expressed by the authors or various contributors to this guide.
FOREWORD
2006: The Year of Squeezed Margins François David, Chairman, Coface
espite a slowdown in world growth, the year 2005 was marked by good corporate solvency, with the Coface world default index settling lower. Companies nevertheless had to endure a deteriorating economic climate. The hike in oil prices was particularly steep, with North Sea Brent up 42 per cent for the year, after climbing 37 per cent in 2004. Prices for commodities and intermediate goods continued to rise albeit less slowly than in 2004. Competitive pressures mounted as goods from emerging countries flooded the market and customs barriers disappeared in some sectors. However, as anticipated by us, companies showed good resistance. On the microeconomic front, two factors lay at the heart of this performance. Firstly, companies found themselves in a comfortable financial position after an exceptional 2004. This enabled them to cope with sustained pressure on margins. Secondly, productivity gains achieved through numerous restructurings and outsourcings helped absorb rising input costs. On the macroeconomic front, unflagging world demand, the resourcefulness of US monetary policy, less intensive use of oil and low prices for goods imported from emerging countries cushioned the inflationary and recessionary impact of rising oil prices. In 2006, world growth will remain strong. GDP should grow at the same rate as in 2005, driven yet again by buoyant US and Chinese demand. The underlying assumption behind this favourable scenario is that major risks to growth continue to be contained. A new sustained oil price hike, a sharp depreciation of the dollar against the background of
D
a gaping US current account deficit, a marked decline in property prices or plummeting growth in China would clearly have a negative impact on business. Unless there is a significant increase in these risks, companies should benefit from the favourable economic climate. However, it is difficult to see any release of pressure on their margins while tough competition, high commodity prices and expensive financing remain the order of the day. Profit margins were already severely tested in 2005, as the breathing space provided by record profits in 2004 recedes. Henceforth, the race for market share against a background of strained balance sheets will make companies, including Chinese ones, more vulnerable to any shock. Some economic sectors, which already found it tough going in 2005, will continue to be exposed in 2006. The competitiveness and upmarket move of Chinese products is undermining companies not only in the textiles–clothing sector, but also in sectors such as electronics and household appliances, where the offering has not sufficiently shifted towards high added-value products. The automotive industry is clearly benefiting from a market driven by emerging country demand, but here too competition is getting fiercer. US car makers, whose financial position is already affected by the burden of pension financing, are bearing the brunt. On the consumer spending front, the retail sector in industrialized countries remains in the grip of stiff price competition that benefits hard discount stores. Finally, the highest oil consuming sectors such as transportation, chemicals, paper and steel, will continue to face high prices for their
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FOREWORD imports as well as difficulties in passing these costs on to their customers. Companies doing business with fast-growing markets will be best placed to ease the squeeze on their margins. This is especially true of the United States where growth should hardly flinch, driven by still vigorous domestic demand despite rising interest rates and a huge household debt. In Europe, the euro’s depreciation is partially responsible for the pickup in exports, particularly in Germany. This favourable trend should continue through 2006, benefiting many countries in the euro area. On the other hand, sagging household demand will continue to undermine the region’s performance as budgetary constraints hamper attempts by numerous countries to kickstart their economies.
Growth in the emerging countries should remain strong, driven by buoyant world demand. Oil prices should remain close to their 2005 levels, given that other commodity prices are not expected to retreat by much. Demand for manufactured goods will remain firm, fully benefiting from the competitive offering of numerous countries led by China. Demand for electronic components will rise moderately. However, disparities in regional performance will remain as will specific risks, the key ones being geopolitical tensions and dependence on international capital markets. Finally, it is important to bear in mind that in emerging countries too, companies are subject to fierce competition and remain vulnerable to changing economic circumstances – even in an environment of sustained growth.
ECONOMIC GROWTH AND CREDIT RISK 2nd oil shock, recession in the USA and weak growth in Europe
1st oil shock, recession in the USA and Europe
7%
Recession in the USA then in Europe
Internet bubble bursts 2000 11 September 2001
300
6%
250
5% 200
S1 2005* 4% 150 3% 100 2% 50 1%
World growth (exchange rate) *
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Payment incidents index (base 100=world 1995–2000)
The payment incident index tracks the changes in incidents monitored in short-term commercial transactions
2005
2006 (p)
2003
–1%
2004
2001
2002
1999
2000
1997
1998
1995
1996
1993
1994
1991
1992
1989
1990
1987
1988
1985
1986
1983
1984
1981
1982
1979
1980
1977
1978
1975
1976
1973
1974
1971
1970
1969
1972
0
0%
–50
INTRODUCTION
The Outlook for 2006–2007 Jonathan Reuvid, Senior Editor, GMB Publishing
ntroducing last year’s edition of The Handbook of Country Risk, it was possible to find hope in both the evolving global political and economic scenarios without expressing any marked optimism that the world would seem a safer place by the beginning of 2006. Overall, the global economy had a rather better year in 2005 than we expected and the outlook for 2006 remains favourable. However, there are now increasing fears that the economic cycle may enter a retrograde phase in 2007 and that slower growth will cause discomfort to developed and developing economies alike. The political prognostication is more pessimistic. Geopolitical fault lines have widened. Except for the threat of North Korean nuclear armament – which appears to have been contained by diplomacy, at least for the time being – and the new-found harmony between India and Pakistan – which is holding in the face of the extraordinary post-earthquake hardship in Kashmir – the risks to international security that we highlighted a year ago have increased. As in previous introductions, we focus first on the political landscape before turning to macroeconomics, which are covered regionally in detail by Oxford Analytica. However this year, before analyzing the major political and economic issues, some brief commentary seems appropriate on the overriding geophysical events that struck during 2005.
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■ THE HAND OF NATURE The series of ‘natural’ physical disasters that began with the Indian Ocean tsunami at the end of 2004 continued in 2005 with hurricanes Katrina and Rita in the Gulf of Mexico and the Kashmir
earthquake. These were the headline events that attracted the most attention and generated varying degrees of relief effort against the backdrop of persistent drought, poverty and famine in Africa. None was intrinsically political but each, in its way, brought recognition of uncomfortable political home truths – both in terms of all nations’ vulnerability to cataclysmic natural events and, in the United States’ case, to the uneven distribution of wealth in the world’s most prosperous nation. The global warming debate continued throughout 2005. Some semblance of progress towards a renewed Kyoto agreement was achieved at the Gleneagles summit with US agreement to engage, without commitment, in further talks. However, the prospects for extended commitments are dimmed by participants’ recognition that dependence on future undiminished supplies of oil is becoming increasingly unsafe and that less ecofriendly sources of fuel, nuclear energy generation and coal, may have to be revived to satisfy demand in the name of national security. ■ THE POLITICAL LANDSCAPE International security and the Middle East The ‘war on terrorism’ continues with few overt signs of success. Iraq is, of course, the cauldron for terrorist activity, but the theatre for acts of terrorism remains global rather than regional. In addition to bombings directed at foreign visitors in the Middle Eastern states of Jordan and Egypt, the London suicide bombings of 7 July 2005 emphasized that the civil populations of those countries within President Bush’s ‘coalition of the willing’ are at risk from home-grown sympathisers of al-Quaeda and other intolerant Muslim extremists.
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INTRODUCTION
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Iraq. In Iraq , the daily toll of death and injury among US and other troops, the local security forces and, in much greater numbers, the innocent population of Shia, Sunni and Kurd civilians is unremitting. Kidnap and ransom remain rife. On the positive side, Iraqis polled at two elections during 2005; the first was held in January on the draft constitution and was largely boycotted by Sunnis. The second in December – Iraq’s first postwar democratic parliamentary election – attracted a strong turnout from all sectors and gave the United Iraqi Alliance (UIA), the Shia Islamist coalition, just under half the seats, leaving it 56 seats short (out of the total 275) of the two-thirds majority needed to begin forming a government. The Kurds took 53 seats and the two predominantly Sunni Arab groupings took 44 and 11 seats respectively. The secular Shia former prime inister, Iyad Allawi, took only 25 seats, emphasizing that the electorate had divided on sectarian lines. In theory the UIA could form a government without Sunni group participation but has declared in favour of a more national government of unity as the bargaining process begins. A desirable outcome is by no means certain; the Sunni are likely to demand ministerial posts and want a commitment to revisit the federal constitution that threatens to deprive them of the oil revenues from the Shia-dominated south. There is a real possibility that negotiations over a protracted period will fail, opening up the threat of disintegration into separate states and civil war, demonstrating the limitations of Western democracy. In the meantime, the unpopularity of the Iraqi mission in the United States is increasing pressure on President Bush for a planned withdrawal of American troops. Afghanistan. So far, the democratically elected government stands firm, although terrorism has not been totally suppressed and the threat of internecine warfare between the factions of rival warloads remains. There is no prospect in sight for withdrawal of the UN peacekeeping force as the United Kingdom takes over leadership, while some of the European members are showing reluctance to continue. Iran. With hindsight, Iran was always a more serious potential threat to international security
than Iraq. As a fundamentalist theocracy with an overlay of democratic trappings, Iran has always presented the West with particular problems in its attempts to engage in constructive diplomatic dialogue. The election of the former mayor of Tehran, Mahmoud Ahmadinejad, as president may have made dialogue impossible for the time being unless his expressed determination for Iran to develop uranium enrichment processes is curbed by the council of mullahs to which he is accountable. Even Russia’s promising offer to act as subcontractor for Iran’s non-military uranium enrichment requirements has been spurned. The Security Council of the UN may well arrive at an early resolution to reprimand Iran and dissuade it from building a nuclear capability. However, the UN is in some difficulty; as Mohamed ElBaradai, director general of the International Atomic Energy Agency points out, any nation has the right, in principle, to build a nuclear-powered energy capability for its domestic fuel supply even if it has an indigenous supply of oil that appears to be more than adequate. It seems less likely that the Security Council will proceed to a programme of economic sanctions if Iran remains obdurate for at least two reasons: both China and Russia have strong vested trade interests in Iranian oil; more practically, economic sanctions have proved largely ineffective in the near-term as an instrument of foreign policy, except in damaging the living standards of ordinary citizens of the target nation. Further down the line, if Iran proceeds to develop a nuclear arsenal, the option of military intervention by the United States, with or without allies, even in the form of ‘surgical strikes’ on installations, seems to have been pre-empted politically in light of the mismanaged incursion into Iraq. No doubt, Ayatollah Ali Khamenei, Iran’s supreme leader and Mr Ahmadinejad are taking Western inhibitions into account. In the meantime, the timing of President Chirac’s recent praise for France’s force de frappe is hardly helpful. Israel and Palestine. The removal of Prime Minister Ariel Sharon, as a result of his disabling stroke on 4 January 2005, stunned Israel with shockwaves widening beyond the Middle East to the foreign offices of Western Europe and the
INTRODUCTION White House. In terms of domestic Israeli politics, it now seems that the new centrist party, Kadima – that Mr Sharon had launched in preparation for the March elections – may not be stillborn and that his co-founder and successor as Kadima leader, Deputy Prime Minister Ehud Olmert, could lead Kadima to electoral victory. If so, Mr Sharon’s policy of building on evacuation of the Gaza Strip towards eventual endorsement of Palestine as an independent state would survive. No-one knows what further programme of withdrawals he had in mind, but retreating to the fence that he had started to build would have offered up 85 per cent of the West Bank to Palestinians. Much depends on what happens now within the Palestinian Authority under the new government and continuing presidency of Mahmoud Abbas. At the first general election in ten years on 25 January, the militant Hamas group, denounced as a terrorist organization by the United Sstates, the EU, Russia and the UN, fielded its first parliamentary candidates and gained an outright majority of seats, sweeping the discredited Fatah government out of office. The extent of Hamas pragmatism will now be tested against its declared mission to achieve the destruction of the state of Israel. The dramatic entry of Hamas into politics could represent an opportunity or a threat. The quartet of international organizations immediately ruled out the possibility of negotiations unless Hamas recognizes Israel and renounces terrorism. Acceptance by the Hamas political party of these pre-conditions, reserving the right of violence for its militant wing, would probably clear the way for discussion. On the down side, the Hamas accession to government could prove fatal to Kadima’s electoral chances and usher Israel’s hardliners into government. Addressing the impasse. Until now, President Bush’s Middle East policy has been tied to the coattails of Ariel Sharon’s strategy of forging a peaceful Palestinian state through Israeli disengagement. However, it is doubtful whether this is the Gordian knot which, once cut, will result in peace throughout the region. It is clear that no solution to Middle East tensions will be found until the Palestinian issue is settled, but much more is
needed now. Only a framework of international undertakings to safeguard security in the region, which neutralizes the potential nuclear threat from Israel and the gamut of terrorist and military threats from Arab states, may be sufficient. Such a regional détente will require the positive endorsement of all Arab states individually including Syria, currently perceived as the agent provocateur of local terrorism, as well as the UN and concurrent commitments by Palestine and Israel. As the sponsors and midwives of the state of Israel post-World War II, the United States, the United Kingdom and France have a responsibility to solve the problems arising from the regional imbalance that they helped to create. However, the task may be too daunting for a US president in the second half of his second administration and for a French president and British prime minister approaching the twilight of their terms of office. Africa A recent Gallup International research poll conducted worldwide found that less than half of the 52,000 interviewed believe that things are getting better in Africa. By contrast, in Africa some 60 per cent were optimistic – almost twice the proportion in Europe. In practice, there is some cause for modified optimism. Although Africa remains desperately poor, the decisions of the G8 in July 2005 to cancel the debts of 14 Sub-Saharan African countries, with a special deal for Nigeria, and to increase aid by US$9 billion before the end of 2006 with an overall doubling by 2010, has brought the hope of improved mediumterm economic development closer. Conversely, the lack of progress at the Hong Kong meeting of the WTO, the latest in the Doha, means that there is no effective relief yet of the tariff barriers against agricultural exports from the world’s poorest countries, in particular those of Africa, to North American and European markets. Africa’s share of world trade remains a miserable 2 per cent. The failure of the Doha Round, to date, offsets the positive action on aid taken by the G8 and delays any future trade benefit that the rest of the world may reap from African economic development. Accordingly, debt relief and
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INTRODUCTION increased aid can be regarded only as a political, rather than a global, economic advance at this stage. Crises in Ivory Coast, Sierra Leone, Sudan and Zimbabwe remain unresolved, but at least some long-running conflicts such as the civil war in Congo have ended. Liberia has elected Africa’s first female head of state. A number of elections that are scheduled for 2006 in Uganda, Zambia and probably Chad, Comoros, the Democratic Republic of Congo and Gambia – some of which could be accompanied by violence – add to the uncertainties that pervade the region. Asia With the continuing sedation of North Korea’s nuclear aspirations (China’s most positive intervention to date in global strategic issues under Hu Jintao’s presidency) the only serious threats to international security come from the activities of alQuaeda terrorists holed up in Pakistan’s borders. Agreement on the future of Kashmir may be a long way off but India and Pakistan have adopted cordial dialogue in place of sabre-rattling face-offs.
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Europe The EU. Nowhere have political fault lines opened up wider in 2005 than in the EU. Although scepticism was expressed a year ago in the outcome of the national votes and referenda on the draft EU Constitution, no-one expected that French and Dutch voters would reject it in successive polls last May. First reactions that the Constitution was ‘dead’ may have been premature but these results did enable the UK government to remove the issue from the political agenda and other governments among the EU-25, where electoral support for it is lukewarm, to delay voting. Federalists, including the new grand coalition government of Germany, argue that the existing treaty should be ratified in its present form, given that a majority of member states (13 out of 25) have already done so by parliamentary vote or referendum, while a majority of French and Dutch voters (nearly two-thirds according to the Eurobarometer poll of December 2005) favour renegotiation rather than scrapping. The latter are unlikely to accept minor tinkering of the present
text. A more subtle suggestion has been put forward by Nicolas Sarkozy, a likely candidate for the French presidency in 2007. He proposed a renegotiation of the constitution to reduce the reforms to an essential set of rules and a charter of rights, and the hiving off of detailed regulations relating to the free movement of capital, labour, goods and services within the single market to a separate text that the national assembly could ratify. Both these approaches ignore the barriers to the successful negotiation of a Constitution that requires unanimous approval by all member states. The first barrier is that the current rulebook for the EU, enshrined in the Treaty of Nice, does not allow enlargement beyond 27 members. This will enable the EU to admit Bulgaria and Romania, but precludes the future admission of Croatia and Turkey for which negotiations were approved to start in December 2005. Plainly, a debate is now required on enlargement and the ultimate limit to membership numbers. The second, equally urgent, issue is a resolution of the long-standing differences between federalists and sovereigntists: whether the EU should evolve according to the ‘social Europe’ concept of its founding fathers, or whether national sovereignty should remain paramount in a single market. The reorganization of the EU’s institutions and system of government is an important, but secondary, issue. The third barrier remains the structure and allocation of the EU budget. The two achievements of the otherwise disappointing British premiership in the second half of 2005 were agreement to begin entry negotiations immediately with Croatia and Turkey and settlement of the 2007–2013 budget. The first decision underscored the urgency of reviewing the limits for EU enlargement. The budget agreement was achieved after rancorous discussion over the UK rebate and at a considerable political cost to Prime Minister Tony Blair. There was no debate on the Common Agricultural Policy (CAP), which accounts for 43 per cent of EU spending. President Chirac’s acceptance of a proposal for a review of the entire budget in 2008 ensures that CAP reforms will be deferred until 2013, as prescribed in the October 2002 EU summit deal.
INTRODUCTION After a flurry of rhetoric on the need for fundamental debate on the future structure and evolution of the EU at the beginning of the British premiership, nothing further was heard until the Austrian presidency raised the issue of the Constitution again in January 2006. Encumbered by the limitation of six-month rotating presidencies, the issue is unlikely to come to a head during either the Austrian or subsequent Finnish terms. Substantive discussion on constitution issues will probably be deferred until the next German presidency at the beginning of 2007. Therefore, no significant progress is expected during the period covered by this edition of our book. Russia and Ukraine The Russian presidency of the G8 for 2006 raises interesting questions. However tarnished President Vladimir Putin’s democratic credentials may be, as his unchallenged dominance of politics leads Russia further down the path to a return of Kremlin autocracy, he is a genuinely popular national leader widely respected as a legitimate head of state. In order to gain a genuine personal triumph when the G8 leaders meet in St Petersburg in June 2006 he needs to come up with constructive proposals in the two areas where Russia has global significance: security policy relating to weapons of mass destruction (WMD) and energy policy. Support for UN initiatives towards Iran will be a necessary condition for showing that Russia is on side in the Western effort to curtail Iran’s nuclear ambitions; President Putin has made a good start in this arena with his offer to participate in a programme to supply Iran with processed uranium or plutonium for civilian purposes. Conversely, in energy policy Mr Putin has made a poor start with his recent display of Russian gas as a political weapon. In January 2006, the stateowned Yukos imposed draconian price increases on gas supplied to Ukraine after briefly cutting off supplies and thereby disrupting pipeline deliveries to some EU members. At a stroke, Russia’s enviable reputation as a reliable contract supplier, maintained during the period of the Cold War, was eroded. Therefore, if Russia wishes to maintain its market share in European energy
supply without risk of competition, it is important for Mr Putin to allay his customers’ concerns by offering acceptable long-term contractual terms for secure supply. Ukraine’s gas dispute with Russia is only the most recent in a series of problems that has afflicted Viktor Yushenko’s presidency since the 2004 ‘orange revolution,’ which promised so much in freeing the country from Russia’s sphere of influence. Mr Yushenko was unable to banish corruption from government administration and dismissed his first prime minister, Ms Julia Timoshenko. Although he has reversed the sale of previously state-owned assets to government cronies and reprivatized Ukraine’s steel giant, Krivorizhstal, successfully in an auction sale to Mittal at a premium price, his credibility has declined rapidly. The deal that Mr Yushenko has struck with Russia on gas will almost double the price of it in the short term, with the prospect of much higher prices later on. It is also a sobering reminder of Ukraine’s heavy dependence on the goodwill of its northern neighbour. US LEADERSHIP Six years into the George W Bush presidency, US performance in its role as global policeman and leader of the free world is ripe for review. The bruising experience of the military incursion into Iraq to depose Saddam Hussein has damaged the United States’ standing overseas and the running score of the weekly death toll of soldiers and civilians is draining popular support at home. As an exercise in extinguishing extremist terrorism, the vacuum created in Iraq may have been counter-productive and has added fuel to the camp fires of al-Quaeda’s friends elsewhere in the Middle East. As the stalwart bastion of democracy and open government every US lapse from its own high standards in the conduct of its affairs – from the treatment of prisoners to the corruption of members of Congress by Washington lobbyists – is seized upon and magnified by the world’s media. Even allies and friends of the United States experience a vicarious satisfaction from the revelation of such shortcomings (‘when the giant stumbles, the dwarfs titter’). But, as we have said before, the United States rather than the UN
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INTRODUCTION remains the free world’s best hope of maintaining international security, and allies in Europe and elsewhere should be rallying round to encourage and support fresh initiatives for a lasting solution to the fundamental issue of instability in the Middle East. At a time when the neo-conservatives in the White House and on Capitol Hill are already twitching their sabres over Iran, the task of restoring the former harmony in US–European relations has become all the more urgent. THE ECONOMIC OUTLOOK The oil and gas factor Oil prices have more than trebled since the latter part of 2001 and, with demand growing strongly while production and refinery capacity are tight or at risk politically, prices are likely to stay high through 2006 and 2007 – probably above US$50 a barrel as Oxford Analytica suggests later in this book. While extra capacity is planned in Saudi Arabia, a major beneficiary of higher pricing, there is no promise that Iraq will be able to restore production to pre-war levels and Iranian threats to withhold oil from Western markets need to be taken seriously. Concerns that Russia may disrupt its supplies should not be overplayed. After all, the continuing growth of Russia’s economy is heavily dependent on its oil and gas revenues and the present price levels suit Russia well. On the demand side, any hope that demand from the United States or China might slacken has faded and there is no reason why demand elsewhere will be reduced. There are two reasons for focusing on oil and gas in an analysis of the world’s economic outlook. First, each time that similar increases in oil prices were experienced (in 1973–1974, 1978–1980 and 1989–1990), the price rises were followed by worldwide recession. Second, this time there have been no indications of global recession so far because house prices and consumer spending have been supported by cheap money, which has offset the impact of pricier oil on household budgets. For how long this balance can be maintained is a key question in assessing whether global real GDP can continue to grow at the average rate of 4.7 per cent enjoyed for the two years 2004 and 2005. To address that question we turn the spotlight on the ■
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three regions that will carry the most weight in determining the outcome. United States In January 2006 The Economist’s poll of forecasters showed an average expectation of 3.3 per cent GDP growth for the year, against an outcome of 3.6 per cent for 2005. However, this result and a similar outlook for 2007 may depend on the ability of the new Federal Reserve chairman, Ben Bernanke, to perform a similar balancing act and exercise the same pragmatism and sang froid as his predecessor. The first half of 2006 looks fairly strong with growth stimulated by the reconstruction programmes following the 2005 hurricane season. However, the economy still has to absorb the full effect of the Federal Reserve’s 13 consecutive interest rate rises over 18 months, which have restrained inflation. If job creation outside the automotive industry remains robust it could increase wage pressures and cause the Federal Reserve to keep raising interest rates as a defence against inflation. A gentle slowdown is predicted for the second half of the year; however a marked downturn in the housing market would reduce equity values in consumers’ homes, bringing to a halt the household consumption in excess of incomes that has led to a negative personal savings rate. The explanation that the United States’ soaring current account deficit, which is now standing at 6.5 per cent of GDP, is the result of excess saving in the rest of the world has never been convincing. It ignores the effects of the Federal Reserve’s own policy under Alan Greenspan for ten years running, to allow the growth in domestic demand to exceed supply while refusing to address asset price bubbles. Mr Bernanke is on record as stating that interest rates should not be adjusted to movements in asset prices unless they affect inflation forecasts. However, if a reduction in house prices causes a marked contraction in consumer demand towards the end of 2006, he will be under pressure to do just that. At the same time, a gentler growth in demand is required to return the saving rate and current account deficit to sustainable levels. Therein lies Mr Bernanke’s dilemma. If the Federal
INTRODUCTION Reserve misjudges the balance between these conflicting requirements, a recessionary impact on all developed and developing economies could be the result. There is a longstanding fear that at some time in the near to mid-term, foreigners, notably the central banks in Asia and oil-producing countries, will decide to stop accumulating the dollar reserves that fund US current account deficits. This concern may be exaggerated. The purchase of dollar assets helps these countries to hold down their own currencies, thereby stimulating their exports. Recent concern has been focused on China, which has offered hints that it is looking eventually to diversify its foreign exchange reserves. In practice, one of China’s main concerns in revaluing its own currency must be that it would devalue its dollar assets; this factor alone will probably ensure that further upward adjustment of the renminbi will be a gradual process. Europe Euro zone. Previous optimism about euro-zone growth in 2005 was misplaced, with an outcome of a 1.4 per cent increase in GDP now expected. Prospects have brightened somewhat since the turn of the year and the current consensus forecast for GDP growth is 1.9 per cent with Germany improving to 1.7 per cent from 1.1 per cent in 2005 and France slackening to the same rate of 1.7 per cent in reaction to the pre-election budget of October 2005. Ireland and Spain are expected to do best within the euro zone, with GDP growth rates in 2006 maintained at 4.5 per cent and 3 per cent levels respectively. Germany’s new Chancellor, Angela Merkel, has made a good first impression at home and internationally, but is swimming upstream in trying to lead the unwieldy coalition government she now heads to deliver structural reform. Pushing Germany’s public deficit below the EU-defined limit of 3 per cent of GDP by 2007 as a first priority is unlikely to stimulate consumption or reduce unemployment below its chronic level of more than 10 per cent. Nevertheless, Germany’s foreign trade balance surplus, which underpins the strength of its economy, widened in 2005 to almost
US$117 billion, far ahead of any European country and second only to Japan. The European Central Bank (ECB)’s timid attempts at counter-inflationary monetary policy through minor upward shifts in the refinancing rate is unlikely to damage growth rates although it is inimical to SMEs. The increase of 25 basis points in December 2005 was the first in five years; a further 50 basis points is considered likely in 2006. The rest of the EU-15. Elsewhere, in the remaining established EU members, Denmark and Sweden are expected to deliver increased GDP growth in 2006 at the 3 per cent level with inflation rates below 2 per cent and without significantly greater unemployment. A moderate improvement to 2.1 per cent is forecast for the UK’s GDP growth in 2006 but no amount of creative accounting can disguise the conclusion that Chancellor Gordon Brown’s much vaunted claim of superior UK performance is unsustainable. The European Commission has already recommended the launch of an excessive deficit procedure against Britain for failing to keep public borrowing below 3 per cent of GDP. UK government spending as a share of GDP, moved up to 42.5 per cent in 2005 from 39 per cent in 1997, is now epected to exceed that of Germany at 45 per cent in 2007. At the same time, UK productivity growth in 2005 was equal to Germany’s at 0.9 per cent against France’s 1.4 per cent, the 1.8 per cent recorded by the United States and 1.9 per cent by Japan. The poor showing of the UK reflects the massive increase of jobs in government and the public services, which do not contribute to national output. It seems that Mr.Brown’s lavish increases in government expenditure may have poisoned the well of his inheritance as Prime Minister Tony Blair’s heir apparent. The CEE-8. In contrast, the productivity growth rate of the CEE-8 members of the EU is reported as being 6.2 per cent in 2005. GDP growth rates among the CEE-8 were markedly higher than those of the EU-15 and are forecast to remain superior through 2007. Poland, the Czech Republic and Hungary, the EU-10’s largest economies, are all forecast to achieve GDP growth
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INTRODUCTION in 2006 of 4 per cent or better. All three countries run budget deficits but only Poland’s is forecast to exceed 3 per cent of GDP in 2006. The Czech Republic and Poland registered current account deficits at 2.5 per cent in 2006 with some reduction expected in 2006. Hungary’s trade balance is the weakest feature of its economy and its current account deficit is forecast to remain at 9 per cent of GDP through 2006.
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Asia Japan. Japan’s economy continues its recovery under the renewed premiership of Junichoro Koizumi. GDP real growth of about 2.5 per cent achieved in 2005 is forecast to continue at a similar level through 2006. Industrial production is running about 3.3 per cent up year-on-year and unemployment has been held firm at 4.6 per cent while deflation is about to be replaced by a modest rate of inflation in 2006 of under half a per cent. Japan’s current account balance continues to run ahead of China’s as well as Germany’s, and the surplus is forecast to continue at nearly 3.5 per cent of GDP through 2006. Weak points in the economy are the budget deficit at 6.5 per cent of GDP and the net government debt ratio at 80 per cent, the fourth highest among OECD countries. However, the banking sector has regained its stability and the Tokyo stock exchange recovered strongly in 2005, although its dealing system had difficulty in handling panic trading this January in one rogue IT stock. India. India has now joined China as a rising star of the 21st century global economy. With a record of almost uninterrupted parliamentary government since independence in 1947, the world’s most populous democracy has gained the cooperation of the United States in its civilian nuclear energy programme and has improved its economic ties with China. A permanent seat on the UN Security Council is now a realistic mediumterm goal. The economy is likely to continue growing at nearly 7 per cent in 2006 for the fourth year in succession. GDP at US$857 billion is still only about one-third that of China but India is firmly set to develop as one of the world’s biggest economies in the next half century.
China. China continues to top the charts as the world’s fastest-growing large economy. Taking into account the additional US$278 billion of nominal GDP (equal to the GDP of Indonesia and approaching one-third of that of India) added to the reported total for 2004, which reflects the previously underestimated service industries in the private sector, GDP growth for 2005 is estimated to be 9.3 per cent (World Bank, 4 November 2005). Growth is forecast to moderate to perhaps 8.7 per cent in 2006 but no serious decline is likely in 2007, except in the event of global recession. China is now reckoned to have overtaken Italy, France and probably the United Kingdom to become the world’s fourth largest economy. One of the most significant changes in the composition of the Chinese economy is that the private sector (including collective enterprises owned by local governments) now accounts for about 75 per cent of business sector output while the number of state-owned enterprises has halved over the past decade. China’s increased overall trade surplus of US$102 billion is of less concern than the larger bilateral trade surpluses with the United States and Europe, which will no doubt prompt further attempts to curb Chinese exports by the US government and the European Commission in the coming months. However, much of the imbalances arise because China is the ultimate assembly point for many consumer products whose raw material content and components are sourced from Asian trading partners, with whom it runs deficits. It is, therefore, the aggregator of much of East Asia’s surpluses with Western markets. The trade-weighted appreciation of the renminbi in 2005, after the formal revaluation of a little more than 2 per cent against the US dollar, was approximately 10 per cent. For the reasons stated earlier, no more than similar appreciations can be expected in 2006 and 2007. The Chinese government is now focusing attention on stimulating domestic consumer demand, which should help to reduce the trade surplus and deflect US criticism. Measures include removing taxes on agriculture, which will benefit consumers in rural areas by doubling the threshold at which
INTRODUCTION they become liable for income tax. An early sign that the policies are bearing fruit is a moderate decline in the growth rate of households’ savings deposits in 2005. The current status of trade imbalances emphasizes that all East Asian economies are as
vulnerable to any marked downturn in demand from its Western customers as are US and European manufacturers from the continuing inflow from China and other Asian suppliers of low cost consumer goods. Global interdependence is inescapable.
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The @rating System
n 2000, Coface introduced the first worldwide insurable company rating scheme. The @rating system assesses the ability of a company to meet its business obligations vis-à-vis customers and suppliers. International businesses can access four rating sytems by logging on to www.cofacerating.com or any of the national websites (eg www.cofacerating.fr). @rating credit opinion sets out the recommended credit exposure for a company using a very simple assessment scale (1 @ = €20,000, 2 @ = €50,000, 3 @ = €100,000 etc). Credit exposure arising from B2B credit transactions is insurable by Coface. An @rating credit opinion is assigned to some 44 million companies worldwide, reflecting Coface’s dual expertise in corporate information and credit insurance. @rating score, launched in October 2002 by Coface and Coface Services, measures a company’s default risk over one year. It comprehensively and accurately rates 4.5 million large, medium and small-sized French companies. The ratings are used not only by different sized companies but also by financial institutions looking for a rating system that complies with new banking regulations (McDonough ratio). Measuring credit risk among companies is an important exercise when addressing not only traditional needs (corporate loans, B2B credit, market credit) but also emerging needs created by new instruments such as loan securitizations and new capital adequacy rules (McDonough ratio). Companies and banks have an even greater need for reliable tools in today’s climate of increasing credit risk and mounting scepticism over corporate accounting practices.
I
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Country @rating – one of Coface’s key skills – allows the various actors in international trade to enhance the security of their transactions. It continuously tracks a series of indicators for 152 countries, evaluating weaknesses in the geopolitical environment, governance issues, economic vulnerabilities, the risk of a foreign currency liquidity crisis, external over-indebtedness, government financial vulnerability and weakness in the banking system. An aggregate rating is assigned to each of the 152 countries, which are monitored on the basis of seven risk categories. The ratings, in ascending order of risk (A1, A2, A3, A4, B, C and D), follow a scale similar to that used by rating agencies. Sector @ratings measure the average level of default risk posed by companies in individual sectors. A rating assesses the likely impact on shortterm payment behaviour of the economic prospects and average corporate financial position in a particular sector. To establish a rating, Coface uses three evaluation criteria. 1. Economic vulnerability of the sector, which reflects how market prospects, price levels and production costs might influence company solvency. 2. Financial strength of companies in the sector, which reflects the ability of companies to cope with economic downturns. This rating is determined by reference to Coface’s corporate ratings information bank. 3. Payment behaviour in short-term transactions is monitored through Coface’s databases.
Country @rating Definitions
conomic liberalization has led to a boom in BtoB trade, with 70 per cent of accounts being settled by short-term instruments. It is therefore vital to assess the risk associated with such transactions. Country @rating addresses this need by evaluating the extent to which a firm’s financial commitments in a given country are influenced by that country’s economic, financial and political prospects. Log on to www.cofacerating.com to access country @rating, the supplement to company @rating.
E
A1 The steady political and economic environment has positive effects on an already good payment record of companies. Very weak default probability. A2 Default probability is still weak even in the case when one country’s political and economic environment or the payment record of companies is not as good as in A1-rated countries.
A3 Adverse political or economic circumstances may lead to a worsening payment record that is already lower than the previous categories, although the probability of a payment default is still low. A4 An already patchy payment record could be further worsened by a deteriorating political and economic environment. Nevertheless, the probability of a default is still acceptable. B
An unsteady political and economic environment is likely to affect further an already poor payment record.
C
A very unsteady political and economic environment could deteriorate an already bad payment record.
D
The high risk profile of a country’s economic and political environment will further worsen a generally very bad payment record.
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Oxford Analytica
Our corporate goal: to be the information industry standard for strategic analysis of geopolitical, macroeconomic and social developments. Founded in 1975, Oxford Analytica is an international consulting firm serving business leaders, bankers, politicians and senior international civil servants looking to gain a better understanding of the global environment in which they operate. Its main focus is on the study and analysis of political, economic and regulatory developments, risk and international strategy. Oxford Analytica draws on the expertise of over 1,000 senior members at leading universities and think-tanks in 80 countries around the world. Numerous departmental heads in strategy, economic research and mergers and acquisitions are able to integrate Oxford Analytica’s studies and analyses into their own decision-making process. The outlook for several regions in this year’s guide has been prepared by the strategic watch department, Daily Brief. Do not hesitate to get in touch with us to try out this service!
Global strategic analysis
© Oxford Analytica Ltd • 5 Alfred Street, Oxford OX1 4EH, United Kingdom Tel: +44 (0)1865 261600 • Fax: +44 (0)1865 242018 • E-mail:
[email protected] • Website: www.oxan.com
Sectoral Overview Sylvia Greisman, Dominique Fruchter and Caroline Dupuis Coface Country Risk and Economic Studies Department, Paris
ector @ratings measure the average level of nonpayment risk associated with companies in individual sectors. A rating assesses the likely impact on short-term payment behaviour of the economic prospects and average corporate financial position in a particular sector. To establish a rating, Coface uses three evaluation criteria:
S
●
the economic vulnerability of the sector, which reflects how market prospects, price levels and production costs might influence company solvency; the financial strength of companies in the sector, which reflects the ability of companies to cope with economic downturns; payment behaviour with regard to transactions payable in the short-term, as reflected in Coface databases.
●
●
SECTORAL PANORAMA Economic slowdown, rising raw material and energy prices, strong competitive pressures – in 2005 all these factors created poorer trading conditions in many economic sectors, affecting the solvency of the weakest economic players. As a result several sectors, including air transport, textiles, chemicals, automobiles and pharmaceuticals, suffered downgrades. In 2006, slightly lower raw material prices and buoyant world demand on the back of widespread stock replacements and strong industrial investment could have a positive effect. Moreover, technical innovations will continue to boost the performance of several sectors. Corporate profit margins, however, will remain under significant pressure: ●
Ratings are awarded on a scale of ten ranging from A+ for the lowest risk to D for the highest risk. Sector @ratings supplement @rating credit opinions on companies and country @ratings. ● HIGHEST RISK
Range of sectoral risks
D CC C+ B-
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Clothing/Air transport
Textiles
Computer equipment/Construction
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B Telecommunications/Automobiles B+ Chemicals AA A+ LOWEST RISK
Mechanicals/Paper/Mass distribution
Pharmaceuticals/Electronics/Steel
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Stiff competition will reduce the opportunities to pass persistently high production costs on to customers. It will also lead to restructurings, as companies refocus on their core businesses, and a further erosion of the activities sold off. Rising interest rates could drive up financing costs. Budget constraints, particularly in Japan and Europe, will restrict volumes and prices in sectors dependent on public sector orders. Stricter environmental and health regulations, both national and international, are likely to drive up costs. Finally, in many emerging countries such as China soaring demand and/or abundant raw
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SECTORAL OVERVIEW materials will attract investment, which could create overcapacity.
Steel output 55,000
Asia European Union (15) USA
50,000 45,000
The continued squeeze on corporate profit margins could undermine recovery prospects in the most vulnerable sectors.
000' metric tons
40,000 35,000
30,000 25,000
20,000 15,000 10,000 5,000
STEEL (A) Despite a fall in prices during the first half of the year, average world steel prices ended in 2005 at an all-time high. In 2006, long product prices could slump as Chinese and Indian production capacities grow. A modest reduction in raw material prices would enable steelmakers and their distributors to continue to post comfortable profit margins. Against this background, defaults will remain relatively rare. In Asia, China and India increased output considerably, while traditional large producers (Japan, Korea and Taiwan) maintained theirs. The resultant oversupply is exercising a downward pressure on prices to levels below those in force elsewhere in the world. Rising exports to the United States, Europe and the Middle East, as well as moderate output, are likely to steady or edge prices upwards. In North America, fears of a shortage in the wake of the hurricanes, falling imports, lower output and higher raw material and gas prices helped steady prices. Higher demand on the back of reconstruction in the south and an increase in public infrastructure spending, however, will not be able to prevent them from falling as significant price differentials with Asia drive up imports. Prices will remains fairly high, enabling players to maintain good profit margins. In Western Europe, a reduction in output and stocks has helped firm up prices as a weaker euro eases import pressure. A slight increase is even likely from the second or third quarter of 2006 if import pressures are contained and domestic demand remains firm. In Central and Eastern Europe too, output is falling, except in Slovakia, Turkey and Russia, where domestic demand and exports remain buoyant. Venezuela, Argentina, South Africa, Egypt, Iran and Saudi Arabia are increasing output in order to meet strong local demand. ■
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Dec 05
Jun 05
Dec 04
Jun 04
Dec 03
Jun 03
Dec 02
Jun 02
Dec 01
Jun 01
Dec 00
Jun 00
Dec 99
Jun 99
Dec 98
Jun 98
Dec 97
0
So urce: IISI
■ PHARMACEUTICALS (A) The pharmaceuticals market continues to grow, albeit less quickly than in the past (up 7 per cent in 2005 and an estimated 6 per cent in 2006), on the back of an ageing population in industrialized countries. Comfortable profit margins, however, are being squeezed by the rapid development of generic drugs, the expiry of patents for leading drugs, the pressure on prices exercised by public healthcare systems and the rising costs of treatment risk prevention. Despite a less favourable environment, corporate payment behaviour remains satisfactory. North America, the biggest market with 43 per cent of sales, saw sales rise by 6 per cent in 2005 according to IMS. Trading should gather pace in 2006 and grow by 8–9 per cent. Reform of the healthcare system (Medicare), designed to encourage access to treatment, will boost sales of generic drugs, benefiting wholesalers and retailers, both of whom have higher margins for this type of product. Laboratories, on the other hand, are facing class actions arising from the side-effects of some of their drugs and could end up paying significant amounts in compensation. In Europe, sales of pharmaceutical products saw only a modest 3 per cent increase in 2005. They were driven by the growth in generic drugs resulting likewise from efforts to reduce health spending. Laboratories such as Novartis, which now controls the world’s No 2 firm, Sandoz, have responded by investing in this segment. Wholesalers and retailers continue to seek synergies, as illustrated by the merger of Boots and Alliance Unichem plc. Besides, concerns over an outbreak of avian flu are providing a growth opportunity for vaccine manufacturers. Central and East European countries will enjoy double-digit
SECTORAL OVERVIEW
■ ELECTRONIC COMPONENTS (A) After a year of stagnation marked by stock liquidations, semiconductor demand picked up in the second half of 2005. The recovery should gather pace in 2006 given the bright prospects for various applications, particularly in the field of consumer electronics. Most manufacturers have benefited from the upturn, strengthening their financial position through higher volumes and prices. After stagnating in the first half of the year, the semiconductor market enjoyed a mild rebound during the second half of 2005 that enabled it to post 7 per cent growth for the year (against 28 per cent in 2004). Intense capacity utilization and low stock levels leads one to believe that this trend will continue through the first half of 2006, yielding 9 per cent growth for the year. Buoyant computer and mobile telephone demand, new car applications, the pick-up in
Monthly worldwide semiconductors shipments 3 month moving average 22,000,000 20,000,000 18,000,000 thousands USD
16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 Jun 05
Dec 05
Jun 04
Dec 04
Jun 03
Dec 03
Jun 02
Dec 02
Jun 01
Dec 01
Jun 00
Dec 00
Jun 99
Dec 99
Jun 98
Dec 98
Jun 97
Dec 97
Jun 96
Dec 96
Jun 95
Dec 95
6,000,000 Dec 94
growth in 2006, compared with 4 per cent for Western Europe, on the back of innovative product launches and significant public spending, despite the increasing use of generic drugs. In Japan, local manufacturers continued to pursue their strategy of consolidation (merger of Sumitomo and Dainippon) to fight off foreign competition against a background of better market access. After growing by 5 per cent in 2005, business will stagnate because of fewer reimbursed drugs and bigger price cuts. Among the emerging countries, China, the world’s eighth largest market, saw sales climb 13 per cent in 2005 and is expected to achieve 17 per cent sales growth in 2006. Its network of pharmacies has been transformed by an ever wider offering of foreign products alongside traditional remedies. Self-medication too is showing promising signs, although it so far only accounts for 10 per cent of the overall market against 30–40 per cent in the West. In Latin America, the pharmaceuticals market continued to be bullish, although it only accounts for 4 per cent of world sales. In any case, competitive manufacturers in the generic drugs segment are springing up in several emerging countries led by India.
network equipment orders and, above all, the craze for all sorts of personal audio and video applications have firmed up prices. Asian demand is vigorous as stocks are reduced. It absorbs 65 per cent of world production not just because of outsourcing to the region but also due to the expanding regional market. However, given the different applications, demand and prices vary with the components. Growth prospects are brighter for flash memories such as NAND, digital processors in consumer electronics, mobile telephones and RFID components used to identify persons communicating by radio, than for DRAM memories, which are used more in computers and NOR memories. The sector’s variable performance reflects the dissimilarity between manufacturers’ financial positions. However, overall profitability is improving and the capacity extensions projected for the next few years demonstrate producer confidence. ■ MECHANICAL ENGINEERING (A-) The market remained generally bullish in 2005, especially in the emerging countries, Japan and North America. In 2006, it will make even stronger gains, driven as usual by the United States and Asia but also by the pick-up in European demand. Payment behaviour should remain good despite the risk of fluctuating steel prices. In Europe, following the sector’s modest performance in 2005, activity should pick up on the back of export-led industrial recovery. Companies will benefit from the euro’s depreciation against the US dollar. Demand for farm equipment in the new member countries will increase, helped by new CAP subsidies. In the
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SECTORAL OVERVIEW USA seasonally adjusted machinery indexes (2000=100) source: census
120 supplies inventories
115
new orders
value of shipments 110 105 100 95 90 85 80
Jun 05
Dec 05
Jun 04
Dec 04
Jun 03
Dec 03
Jun 02
Dec 02
Jun 01
Dec 01
Jun 00
Dec 00
Jun 99
Dec 99
Jun 98
Dec 98
Jun 97
Dec 97
Jun 96
Dec 96
Dec 95
75
other countries of the EU, however, the tractor market will shrink by about 3.8 per cent in 2006 because of a reduction in direct aid for farmers. In the United States, production of industrial machinery increased 6 per cent in 2005, despite the adverse impact of Hurricane Katrina on the states bordering the Gulf of Mexico. Farm machine sales grew, boosted by subsidies to farmers. In 2006, trading in the sector will remain vigorous as industrial investment increases and exports surge. Demand for public works machinery will be lifted by reconstruction needs and additional infrastructure spending. In Japan, demand for industrial goods remains buoyant due to strong exports and good production capacity utilization. PAPER (A-) Pulp, chemicals and energy prices remained high in 2005. The European paper industry felt a tight squeeze on profit margins in the face of sluggish demand and overcapacity. On the other hand, US and Asian paper manufacturers enjoyed stronger demand and so were able to pass the cost increases on to customers. 2006 could be a better year as pulp prices drift lower and demand remains strong internationally and picks up in Europe. Wholesalers of printing and writing paper, however, will continue to face strong competition amid moves by manufacturers to insource the distribution business. Plant closures in North America and Europe and low stock levels are keeping pulp prices at fairly high levels, enabling manufacturers to pass the bulk of energy and raw material price increases on to
■
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customers. Factory transfers to timber-producing emerging regions (Latin America, Asia) are also having a favourable impact. However, the profitability of Canadian and Brazilian producers is being eroded by the appreciation of their currencies. In 2006, the expected levelling off of prices could hurt profit margins in the sector. In Europe, weak demand and continued paper-making overcapacity curtailed price increases, affecting margins for the year. Combined timber and pulp producers, especially in Northern Europe, had better profit margins. In 2006, the upturn will boost demand, enabling prices to rise slightly. Growth segments will include packaging paper and boxes as well as woody-coated paper for use in magazines and advertising vehicles. In North America, prices for packaging products and newspaper will continue to benefit from firm demand and reduced capacity. Coated paper prices should remain buoyant on the back of a strong advertising and institutional market. On the other hand, prices for wood-free uncoated paper will be subject, as in Europe, to strong competition from IT and the internet. In Japan, the paper sector is stable but contains paper-based disparities. Japanese coated paper consumption increased at a moderate pace, while that of newspaper and uncoated paper was stable. The packaging sector declined due to sagging demand from barley, wheat, rice and flour producers. Among the emerging countries, Brazil is becoming a big player, benefiting from production costs that are three to four times lower than in Europe. The influx of foreign investment, especially from Scandinavia and North America, should enable it to double pulp exports and lift paper sales by 50 per cent by 2012. Asia remains a vibrant market where demand props up world prices, but the expansion of China’s production capacity could limit imports in the future. ■ RETAIL (A-) Rising transport and packaging costs partially passed on to consumers by suppliers, together with higher packaging costs at warehouses and points-of-sale, do not call into question the satisfactory financial performance of the sector
SECTORAL OVERVIEW as a whole, despite a handful of exceptions in Germany, Italy, the Netherlands and Japan. The market continues to be marked by strong national disparities. The maturity of traditional markets, the saturation of some emerging markets and the competition generated by the hegemony of a few global or local giants are leading retailers to capture new markets and consolidate their positions through internal and external growth. In the United States, retail sales bounced back strongly after the hurricane-induced downturn. While late deliveries and higher transportation costs arising from the damage to ports and waterways affected all players, performances vary greatly according to sales channel and product. Supermarket chains in competition with Wal Mart, for example, are losing a proportion of their customers to discount stores and delicatessens, despite diversifying their offering. Department stores, except those at the top of the range, and neighbourhood stores are also finding the going hard. In Japan, the sector’s restructuring is not complete. While supermarkets and neighbourhood stores have seen their overall profitability improve, the financial performance of department stores remains very patchy. Nevertheless, the prospect of firmer household demand, with its positive impact on business led Wal Mart, on the one hand, to acquire a majority stake in the supermarket chain Seiyu, and Seven & I Holdings (which owns the 7Eleven neighbourhood shops and Ito Yokado supermarkets), on the other, to take over Millenium Retailing, owners of the department stores Seibu and Sogo. In Europe, retailers’ financial performance is influenced by the level of consumption as well as the intensity of competition in each country. Germany and the Netherlands are, from this standpoint, the worst performing markets. In Germany consumption is stagnant. Price competition is exacerbated by the strength of independent discount stores, while KarstadtQuelle and Promarkt attempt to turn their financial situation around. In France, competition is hotting up with the arrival of independent discount stores,
the gradual review of price regulations and the opening of new sales areas. In the United Kingdom, consumption has plummeted, exacerbating competition and squeezing margins. In order to compensate for their lacklustre performance in mature markets, European and US retailers are multiplying their sales channels and presence in the emerging countries of Asia, Central and Eastern Europe, and Latin America, at least wherever the legislation so permits. Western retailers are penetrating Central and Eastern Europe through town-centre hypermarkets, expanding their presence in medium-sized towns and attempting to develop their supermarket business against opposition from local players. ■ CHEMICALS (B+) Business slowed in 2005, falling to 3.4 per cent from 5.3 per cent in 2004 despite the undeniably sharp increase in emerging countries’ output. In 2006, growth will be driven by the industrialized countries at more or less the same rate (3.6 per cent). However, intermediate and downstream chemicals manufacturers are still struggling to pass higher costs on to consumers. This is eroding their profit margins. In an attempt to control costs, companies are increasingly relocating to regions rich in raw materials and vibrant markets. In the United States, business fell back sharply to 0.3 per cent in 2005 from 3 per cent in 2004 due to the impact of the hurricanes and stock liquidation. Basic chemicals were the worst hit as a number of production units located in the Gulf of Mexico were put out of commission. The year 2006 will see a slight recovery (1.3 per cent) on the back of rising exports and local industrial activity. Organic (polymers, rubber) and specialist chemicals will benefit more than inorganic chemicals. In Europe, business declined slightly, down to 1.6 per cent in 2005 from 2.6 per cent in 2004. Fine and specialist chemicals were hit especially hard by the slump in European industrial demand, intense competition and high input prices. Volumes indeed increased but could not prevent a reduction in margins. The market recovered in the second
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SECTORAL OVERVIEW half of 2005 and should grow by 2.3 per cent in 2006. This will help restore margins. However, more restrictive European environmental regulations will create additional costs. In emerging countries, the growth in activities with high chemicals consumption, agricultural modernization, infrastructure development and soaring household demand are stimulating local output (up 8 per cent in 2005 and 2006 in Asia) and imports. The Middle East is at the heart of the movement to refocus the petrochemicals industry geographically in regions with natural resources. Trading conditions in this market will remain sound and favourable due to the saturation of world production capacity. TELECOMMUNICATIONS (B) The sector grew moderately on the back of mobile telecommunications and the internet. While mature markets offer fewer growth prospects than emerging markets, they nonetheless remain the most important as well as the most profitable. Competition is restricted by legislation, entry costs and the high-tech nature of investment limit market access, as well as by growing concentration of the sector. Against this background, terminal manufacturers are facing a tight squeeze on margins. Operators, on the other hand, have turned in a satisfactory performance, while equipment manufacturers have managed to restore a certain degree of price control after several difficult years. Network equipment manufacturers mainly in North America and Europe (13 per cent of overall sales) are taking advantage of the increase in orders (up 8 per cent in 2005 and 2006) to restore a certain degree of price control and improve their financial position. Asian players continue to keep a low profile. However, production is being outsourced to new markets like India. Manufacturers of mobile telephones (7 per cent of overall sales) saw sales soar to 800 million handsets in 2005 against 680 million in 2004. However, earnings have not kept pace with sales because the expansion is concentrated in emerging regions where new phones are cheap and the second-hand market highly developed. In Western ■
xxvi
Europe, North America and the developed countries of Asia, the market is growing very slightly and is driven mainly by replacements offering new functionalities. Yet it remains more profitable. European and US manufacturers have no hesitation in outsourcing or subcontracting component assembly to Asia. Service providers (80 per cent of overall sales) such as telephone, cable and satellite operators are flourishing. In the United States, the market is highly concentrated around a few large telephone and cable operators. In Western Europe, domestic telephone markets continue to be dominated by a handful of leaders that include the traditional operators. Their high profitability enables them, among other things, to expand into the eastern part of the continent and buy up competitors. The decline in fixed telephony is offset by the growth in ADSL internet links and combined fixed and mobile telephone services. Many operators offer packages comprising telephone, television and the internet, erasing the demarcations between services as well as transmission modes. The growth of internet-based telephone services and mobile telephone services capable of switching between mobile and fixed-line networks or between cable and radio will end up blurring boundaries. ■ AUTOMOTIVE (B, negative watchlisted) In 2006, the world market is likely to grow 4 per cent, driven yet again by the emerging countries. Mature markets will change little, although they will continue to provide most of the outlets. In the face of stiff competition, the two biggest US car makers GM and Ford (22 per cent of world car production) are losing market share and experiencing severe financial difficulties, exacerbated by their wage and social security commitments. This worsens the level of risk for the sector as a whole at a time when other manufacturers, along with their suppliers, are turning in an extremely patchy performance that varies according to location and product. In North America, 2005 ended with stagnant production and a 1 per cent increase in sales. This trend should continue in 2006. The market, however, is not to everybody’s advantage. With the
SECTORAL OVERVIEW exception of Daimler Chrysler and BMW, North American and European car makers continue to lose market share to Asian, in particular Korean, brands. Despite expensive promotions, General Motors’ and Ford’s market share declined to 43 per cent in 2005 from 46 per cent the year before. Sales of their oversized ‘sport utility vehicles’ (SUVs) and ‘trucks’ were hit by soaring petrol costs and corporate earnings by costly wage and social security agreements. Their difficulties are being passed on to suppliers, as exemplified by Delphi’s Chapter XI filing. Locally-based Asian car makers, on the other hand, are doing extremely well. In Europe, sales hardly grew in 2005 and are not expected to do any better in 2006. The increase in car registrations in France and Germany was offset by declines in the United Kingdom and the Netherlands. In Central and Eastern Europe, sales climbed sharply in Russia and Turkey but fell again in Poland. Car makers are not benefiting equally from the market. The majority of Korean and Japanese manufacturers are doing well. The same cannot be said for the others. Of the European and American car makers, BMW alone continues to post excellent results. Fiat should make a turnaround. Restructuring and outsourcing are the order of the day in an attempt to restore or improve profitability. The introduction of the latest European regulations aimed at liberalizing car dealerships should not significantly impact on sales networks, which have had time to consolidate their positions. In Latin America, sales are buoyant in several countries due to the favourable local economic climate. Brazilian production benefited from the sharp increase in exports, offsetting the slow growth in domestic sales. Manufacturers’ profit margins nevertheless remain disappointing against a background of considerable overcapacity. In Asia, the Chinese market has confirmed that it is back on the road to recovery. Sales rose 20 per cent in 2005 as buyers expected no more price cuts. Japanese and Korean car makers have been the principal beneficiaries because of their local presence, which has helped offset weak domestic sales growth. However, significant overcapacity and the large number of players are preventing
prices from attaining a level commensurate with adequate profitability. ■ CONSTRUCTION (B-) Trading in the sector during 2005 was characterized by a vibrant private housing market, a rally in non-residential construction and persistent weakness in the public construction market. In 2006, higher interest rates and a possible slump in property prices constitute a risk for the housing construction market in some countries. Barring a major shock, the latter should decline gradually while non-residential construction should grow. The financial position of companies is heavily conditioned by the performance of domestic markets. While higher production costs can easily be passed on to consumers in the fastest growing markets, they squeeze the profit margins of companies operating in the least lucrative markets, such as Germany and Japan. In the United States, business grew 10 per cent in 2005 on the back of residential construction and public works. Unless property prices plummet from their currently very high levels, residential construction will fall back slightly in 2006. However, this should be offset by the continued strength of the housing refurbishment market. Public works should continue to benefit from government and local authority spending, securing a spate of orders in connection with the reconstruction of hurricane-torn regions. Public and private non-residential construction should continue to rally. In Europe, business will continue to grow by under 2 per cent in 2006. Sales will continue to fall in Germany as well as Portugal. The Italian market will remain weak, partially offset by buoyant Spanish and Central European markets. Residential construction in the United Kingdom, Spain and France will perform less robustly, while fears of the property bubble bursting remain very much alive in Spain. On the other hand, housing refurbishment and public works will remain strong throughout the region, while the non-residential sector should rebound. In Japan, the sector’s overall performance should continue to weaken in 2006 due mainly to
xxvii
SECTORAL OVERVIEW United States New one-family home sales 1,500 1,400 1,300
Thousand units
1,200 1,100 1,000 900 800 700 600
source: Department of commerce Jun 05
Dec 05
Jun 04
Dec 04
Jun 03
Dec 03
Jun 02
Dec 02
Jun 01
Dec 01
Jun 00
Dec 00
Jun 99
Dec 99
Jun 98
Dec 98
Jun 97
Dec 97
Jun 96
Dec 96
Dec 95
500
the persistently poor performance of public construction, which continues to bear the costs of deteriorating public finances. Private residential construction has stabilized, while private nonresidential construction, in particular factory building, will continue to rally. INFORMATION TECHNOLOGY (B-) Business grew satisfactorily in 2005 but could dip in 2006. Trading is stronger in emerging regions than in industrialized countries, even though the latter still hold the largest market share. Computer manufacturers and their subcontractors continue to face downward pressure on prices, forcing them to diversify, outsource or penetrate new markets. Margins remain under severe pressure. Software designers and service providers, on the other hand, are restoring a certain degree of price control as customers return. In 2005, personal computer (PC) sales rose 15 per cent in volume terms to 210 million units, but stagnated in value terms. This divergence results from the surge in laptop demand (20 per cent, although still only a quarter of the market), a moderate increase in desktop demand (6 per cent) and falling prices as technology becomes more commonplace. World demand could weaken in 2006, growing only 10 per cent as sales start to slacken again. Emerging markets (China and India are the two leading ones), which account for 36 per cent of PC sales, are by far the most vibrant, with growth at times topping 30 per cent. For global groups the stakes are high given the dominant position in these markets of assemblers offering unbranded products. Europe’s performance was average, with the United States and Japan posting the lowest growth for 2005. ■
xxviii
Outsourcing of component manufacture and assembly to Asia is on the increase. To counter the fall in PC prices, manufacturers are focusing on laptops and extending their offerings to flat screens, MP3 players and servers, as well as services and software whose prices are more resistant. However, there is a real risk of overcapacity and a price collapse, as in the case of screens. Services (around 40 per cent of the IT market) and software (25 per cent of the market) are also doing well. The delays accumulated by companies in their IT development as well as US corporate governance and the obligation to comply with the Saxbanes Oxley Act have sharply driven up financial and accounting software sales. Security remains an ongoing issue. The sector is concentrating as outsourcings, especially to India, become more proactive than reactive. ■ TEXTILES (C) AND CLOTHING (C-) The abolition of quotas strengthens China’s position as supplier to the North American and European markets. More restructuring and outsourcing is now inevitable. Against this background, payment behaviour remains shaky, especially in Europe. The abolition of quotas on 1 January 2005 has mainly benefited China, whose garment exports to the United States and the EU grew by 57 per cent and 36 per cent respectively during the first half of 2005. Despite the fact that their economies were already running out of steam, the EU and the United States signed a deal with China in June and November 2005 respectively, under which China agrees to limit its export increases for a few more years. This will benefit India, other supplier countries in South Asia where Chinese firms have efficient factories, as well as Mediterranean and Central American countries, which can effectively leverage their regional proximity and trade agreements with the European Economic Area and NAFTA. It will not dispense middle-income countries from moving upmarket to prevent the collapse of their textile industry – all the more so as China is already engaged in this process through the tie-up between garment manufacturer Youngor,
SECTORAL OVERVIEW European Textile business survey 30
difference between + & - replies
confidence indicator
Order books
0
-30
Jun 05
Dec 05
Jun 04
Dec 04
Jun 03
Dec 03
Jun 02
Dec 02
Jun 01
Dec 01
Jun 00
Dec 00
Jun 99
Dec 99
Jun 98
Dec 98
Jun 97
Dec 97
Jun 96
Dec 96
Jun 95
Dec 95
Jun 94
Dec 94
Jun 93
Dec 93
Jun 92
Dec 92
Jun 91
Dec 91
Dec 90
Jun 90
-60
allied with Itochu of Japan, and the Italian firm Marzotto (Hugo Boss and Valentino). All in all, only those countries removed from the vast markets (Sub-Saharan Africa, Malaysian and Indonesian archipelago), and whose textile industry has developed artificially under the protection of preferential agreements, stand to lose market share. In Japan, the sector is led by large international groups that have outsourced production to China (Japan’s leading supplier) and South East Asia, while refocusing on high added-value fabric manufacture. This has helped improve corporate profitability. ■ AIR TRANSPORT (C-) The sector was hit particularly hard by rising oil prices in 2004 and 2005. The growth in airline passenger traffic, up 7 per cent in 2005, hardly offsets the negative impact of these rises on corporate earnings. Passenger numbers, moreover, are expected to fall by 3 per cent in 2006. For many airlines, these difficulties are exacerbated by extremely high operating and financial costs and fierce competition from lowcost operators. Against this background, a number of US carriers have racked up record losses and sought protection under the Bankruptcy Act. The sector presents a high level of risk that varies from region to region. Air passenger traffic increased 7 per cent in 2005 after climbing 14 per cent in 2004 and should rise by 3–4 per cent in 2006. Business has, in fact, slowed since early 2005, particularly in Europe and North America, reflecting trends in world tourism
that show a bigger fall in business travel than leisure travel. Despite favourable market conditions and 75 per cent occupancy, losses for the sector again reached record levels in 2005, mainly on the back of US airlines. Indeed, some companies were again unable to generate profits this year due to the heavy fuel bill. Air freight traffic grew 2 per cent in 2005 after jumping 13 per cent in 2004 and should increase by 3 per cent in 2006. The steep tariff increases that carriers unhesitatingly impose on their customers and the correlation between international freight and economic activity explain the drop in performance. However, freight’s higher profitability is pulling airlines away from passenger transport. In the United States, the sector experienced its fifth straight year in the red, reporting a loss of US$8 billion. Most of it concerns ‘legacy airlines’, ie traditional carriers whose accounts are burdened not only by rising fuel costs but also by operating and debt servicing costs that place them at a disadvantage compared with low-cost airlines. Four are under the protection of Chapter XI and so may renegotiate their commitments to bring them closer into line with the low-cost structure. Unless there is a marked fall in fuel prices, the situation will remain difficult. In Europe, airline companies are for the most part managing to stay afloat, with some reporting comfortable margins, mainly on the back of a lower degree of dependence on domestic traffic where low-cost competition is concentrated. The prospects for 2006 are not quite so favourable on account of a slowdown in activity, intense competition for transatlantic routes and less attractive arrangements to cover fuel purchases. In Asia-Pacific, passenger traffic remains strong. The region’s airlines will this year again be comfortably in the black, even if performance will be down from last year due to high fuel costs. These carriers will benefit from the region’s strong growth and the tiny presence of low-cost operators in their market.
xxix
OUTLOOK FOR 2006
Strong Growth but Risks in Euro Zone Experts from Oxford Analytica, Oxford ising interest rates will be centre-stage in 2006. The capital markets are likely to discriminate between the OECD and emerging markets, and between emerging markets with strong external positions and those without. Whereas oil prices and the US dollar focused attention in 2004 and 2005, interest rates are set to be the main focus in 2006.
R
KEY INSIGHTS US growth should remain relatively strong – at 3.1 per cent – although the risk of an asset-price decline remains. ➙ Euro zone growth will fall below OECD projections as governments concentrate on containing their budget deficits. ➙ The US Federal Reserve is likely to continue raising interest rates well into 2006, putting short-term rates above 5 per cent by September. ➙ The attractiveness of US yields will increase pressure on emerging markets to raise rates. ➙ Assuming oil prices level off, OECD economies may have more discretion to stabilize interest rates. ➙
xxx
The US Federal Reserve has raised short-term interest rates by a cumulative 300 basis points since it began the current tightening cycle on 30 June 2004. The Federal Reserve’s 175 basis points of tightening in 2005 exerted only minimal pull on global interest rates. Asian rates rose the most, by an unweighted average of 100 basis points. At the other end of the spectrum is Europe, where cuts in the United Kingdom and Sweden offset a hike in Norway. This divergence will be put to the test in 2006, with modest tightening in the euro zone and United
Kingdom, and faster rate rises in some emerging markets, as US yields become more attractive. HIGHER US RATES A key objective of Federal Reserve policy makers must be the acquisition of a ‘neutral’ Federal Reserve funds rate, in the sense of being consistent with high employment levels without stoking further asset price inflation, particularly in real estate. Consensus forecasts of the ‘neutral’ rate seem too modest. The Philadelphia Federal Reserve’s survey of interest rate forecasts, dated 14 November 2005, found a median projection of 4.6 per cent for the fourth quarter of 2006 (3-month Treasury bill yield). Yet, adjusted for headline inflation, real short-term interest rates are still negative at the end of 2005. Indeed, real interest rates have risen by a modest 118 basis points since mid-2004 (adjusting the June 2004 interest rate by the ex-post June 2004 inflation rate). This will put pressure on the Federal Reserve to raise rates throughout the first three quarters of 2006, possibly raising rates above 5 per cent by September. Two other considerations favour tightening: ●
●
Dollar support. The dollar may decline as the foreign exchange market expects the peak of the US interest rate cycle to be reached during 2006. However, with an external deficit exceeding 6 per cent of GDP, the Federal Reserve will not want to ease policy prematurely, lest a dollar sell-off turn into a destabilizing depreciation. Asset prices. A higher interest rate also has the virtue of giving the next chairman of the Federal
STRONG GROWTH BUT RISKS IN EURO ZONE Euro-area: Spare capacity 10
5
8
4
6
3
4
2
2
1
0
0
–2
–1 –2
–4 2001
2002
Output gap (% of potential GDP)
2003
2004
Unemployment rate (%)
2005 Short-term interest rates (%)
Reserve, Ben Bernanke, more ammunition to respond to an asset price decline, should this materialize. This is the preference of Alan Greenspan, the outgoing chairman, preference for dealing with asset bubbles. US–OECD DIFFERENTIALS Higher US interest rates will not be matched onefor-one in the rest of the OECD. Policy makers in many of these economies prefer a strong dollar, and will be content to let interest rates do the work for them. With the exception of Japan in 2001–2004, they have not opted for the East Asian route of market intervention to effect this end. Inflationary pressures are the main limit on this strategy. Although oil prices in 2006 will remain high, they are unlikely to rise significantly. This means that year-on-year oil price increases may become progressively weaker throughout 2006. Although some of the 2005 oil price increases have yet to feed through to the economy, on balance OECD central banks will have more discretion to allow some of the US rate rises to go unmatched. Hence, the European Central Bank (ECB) should be content with the rate rise
implemented from 2 per cent to 2.25 per cent – the first increase in the key lending rate for five years. EMERGING MARKETS However, high US yields are likely to increase pressure on some emerging-market assets.This will be more pronounced in economies with weakening current accounts, forcing a quicker pace of tightening than witnessed in 2005. For instance, Thailand and the Philippines raised rates by 175 and 75 basis points, respectively, in 2005; further rate rises are likely in 2006. GROWTH OUTLOOK Domestic demand growth should quicken in more economies in 2006. Such strength is likely to be most apparent in Japan and China. Japan is likely to grow 2.2 per cent and China by 8.5 per cent, with a larger contribution from consumer demand, especially in Japan. The US economy will probably grow by 3.1 per cent, while euro zone growth is likely to fall short of OECD and IMF projections, reaching only 1.5 per cent. The world GDP growth rate – measured at market exchange rates – should grow around 3.0 per cent, with global trade growing by 7.3 per cent, irrespective of progress in the Doha Round talks. ASSET DECLINE? Although still unlikely, a key risk from higher US interest rates is a downward adjustment in one of the more frothy asset markets, including commodities, housing and, by some estimates, OECD equities and emerging-market debt. In the United States, the Federal Reserve would have ample room to respond with a substantial rate cut. Bernanke could justify such a move regardless of contemporary inflation rates, since it would be
2006 World GDP growth predictions
Oxford Analytica OECD IMF
World
United States
Euro zone
Japan
China
World trade growth
3.0 2.9* 3.2
3.1 3.5 3.3
1.5 2.1 1.8
2.2 2.0 2.0
8.5 9.4 8.2
7.3 7.2* 7.0
*
OECD area Source: Oxford Analytica
xxxi
STRONG GROWTH BUT RISKS IN EURO ZONE anticipating the deflationary consequences of the asset price adjustment. Even so, a fall in stockmarket or house prices would strain household balance sheets, thereby inducing a pull-back in consumer expenditure. EURO ZONE The second downside risk is a euro zone contraction, given that single-currency governments in 2006 will focus on containing their budget deteriorations. Measures such as the tax rises encompassed in the German budget are not consonant with demand stimulus. Yet for the global economy, a euro zone contraction would be far less damaging than a US contraction, by virtue of the fact that the euro zone has been a net drag on global growth, measured by its current account surpluses. It has posted a current account deficit only three times in the past 20 years. The greater likelihood is that the euro zone will remain in a low-equilibrium growth path, with households oversaving in response to uncertainties
xxxii
raised by structural reforms. Normally, this demand shortfall could be counteracted with a governmentled expansion. Yet precisely the opposite is called for by the strictures of the Stability and Growth Pact (SGP) and the intellectual persistence of supplyside policy prescriptions at the supranational and international level. However, with euro zone government borrowing rates at generational lows, and unemployment rates at generational highs, the evidence of a significant negative output gap is unmistakable. In a favourable scenario, wider recognition of this fact could pave the way for an officially sanctioned, proactive fiscal strategy. CONCLUSION The global economy should post another year of strong growth as the key challenge shifts from high oil prices to interest rates. Starting from a low base, interest rates are unlikely to place unsustainable pressure on frothy asset markets. Japan will do more to pull the global economy, but the euro zone will remain trapped in a low-growth equilibrium.
Europe and the CIS 1 Growth in Euro Zone Set to Remain Poor
2
Russian Oil Slowdown Set to Spread
5
The Range of Country @ratings in Europe and the CIS Albania Armenia Austria Azerbaijan Belarus Belgium Bosnia and Herzegovina Bulgaria Croatia Cyprus Czech Republic Denmark Estonia Finland France Georgia Germany Greece Hungary Iceland Ireland
8 13 14 15 17 18 19 23 24 27 30 31 35 37 40 43 47 48 52 54 58 59
Italy Kazakhstan Kyrgyzstan Latvia Lithuania Luxembourg Macedonia Malta Moldova The Netherlands Norway Poland Portugal Romania Russia Serbia and Montenegro Slovakia Slovenia Spain Sweden Switzerland Tajikistan Turkey Turkmenistan Ukraine United Kingdom Uzbekistan
61 65 68 69 72 75 77 78 79 80 83 85 89 91 96 99 102 105 108 112 114 118 119 122 123 127 131
1
OUTLOOK FOR 2006
Growth in Euro Zone Set to Remain Poor Experts from Oxford Analytica, Oxford
he disappointing growth outcome for 2005 reflects the particular weaknesses of the core euro zone economies in an unstable global economic environment as well as the asymmetries of policy making. There is little prospect of improvement in either the performance of key national economies or of policy reform in the year ahead.
T
KEY INSIGHTS ➙ GDP growth in the euro zone is likely to shrink to just 1.3 per cent for 2005 and rise only slightly to 1.5 per cent in 2006. ➙ Weak domestic demand in the core economies has produced an over-reliance on exports as the main motor of growth. However, this has exerted downward pressure on both direct and indirect wage costs in the euro zone. ➙ The drop in growth in the euro zone economy means that it is still too weak to generate any improvement in employment. ➙ Annual inflation is set to continue above the 2 per cent target of the European Central Bank (ECB), but only marginally. ➙ Further monetary tightening can be expected, although the ECB’s limited mandate means this will be used for price control rather than economic stimulus. Structural reform is the key to improvements in growth and employment.
recovery following growth of 2.1 per cent in 2004. The stubborn refusal of the euro zone economies to match such optimistic expectations – with a likely outcome of just 1.3 per cent GDP growth for 2005 and 1.5 per cent in 2006 – can be explained not simply with reference to the marked rise in crude oil prices, but also to the misinterpretation of the dynamic potential of the bloc’s core economies: ●
●
● ●
Demand asymmetries. The euro zone has been characterized by significant disparities in the contribution of individual factors of demand to overall growth. Above all, the weakness of all categories of domestic demand in the core economies over the last two business cycles has produced an over-reliance on exports as the main motor of growth: ●
2
At the beginning of 2005 there were confident expectations by most official forecasting institutions that the euro zone would continue its tentative
Italy has shown the most marked deterioration and, after predictions of modest growth of some 1.6 per cent this year, will be lucky to avoid a recession. Germany will struggle to achieve 1.0 per cent growth in 2005 after predictions of 1.8 per cent at the beginning of the year. France’s growth will slip to below 2 per cent but has stood up best to the weakening of demand. Only Ireland (4.6 per cent) and Spain (3.2 per cent) look like exceeding earlier expectations.
With a partial slowdown of global trade growth this year – partly due to increased energy costs worldwide – the fall in the growth rate of euro zone exports from 6 per cent in 2004 to
GROWTH IN EURO ZONE SET TO REMAIN POOR Euro-area: CPI
Euro-area: GDP
year-on-year, %
% change, year-on-year 3.0
Euro-area
Spain
France
Germany
2.5
Italy
5 4
2.0 3 1.5
2
1.0
0
1 Feb-04
Jun
Oct
Feb-05
Jun
Oct
Source: Eurostat
●
approximately 3.6 per cent in 2005 was reinforced by the appreciation of the euro. This has not been compensated by domestic demand; household consumption growth is set to weaken from 1.4 per cent in 2004 to 1.1 per cent in 2005, with a very low likelihood of any improvement in 2006.
Confidence indicators suggest a slight improvement in 2007, but not one that suggests any pressure on capacity, the utilization of which remains moderate. This asymmetry of demand remains the primary political challenge to the member states of the euro zone, both individually and collectively through their shared policy framework. High unemployment. The interrupted recovery of the euro zone economies means that growth remains insufficient to generate any improvement on the employment front, in particular to halt the rise in aggregate unemployment in the euro zone for the year from 8.6 per cent to 8.7 per cent or more. The combined effect of productivity improvements and the outsourcing of labourintensive processes in both manufacturing and the service sector means that unemployment in the euro zone will only show noticeable signs of improvement when annual GDP growth is consistently above the 2 per cent level. This is arguably unlikely before 2007. Despite this, several euro zone states are depending on higher levels of growth to realize their ambitious programmes of budgetary consolidation and to raise levels of consumer and investor confidence.
1999
2000
Source: Eurostat
2001
2002
2003
2004
2005f
–1
Inflation prospects. Annual inflation is set to continue above the 2 per cent target of the ECB, but only marginally. The resilience of the euro zone to the effects of the virtual doubling of crude oil prices since 2002 can be largely ascribed to the successful reduction of the oil dependency of production in the EU since the early 1970s. Furthermore, the increased revenues of oil-producing countries, most notably in the Middle East and Russia, have generated high levels of reciprocal demand for euro zone investment and other goods. Economic sentiment. The European Commission’s latest monthly report on the current business climate showed a further improvement in the overall economic sentiment indicator in both the EU and the euro zone. Nevertheless, economic sentiment is still far from rosy: ●
●
The recent improvement has only just restored the median level of the last ten years and is considerably less optimistic than in the 1997–2001 period. The most recent IFO business climate indicator for Germany shows a renewed downturn in business sentiment, notably in retail and other services, reflecting the continuing fragility of the domestic demand of private households in the euro zone’s key industrial economy.
Policy environment. The euro zone’s asymmetries of demand correspond in part to a set of political preferences that seek to maximize the export competitiveness of European economies against the
3
EUROPE AND THE CIS background of intensified global competition for both export and capital markets. There are thus downward pressure on both direct wage costs and the indirect wage costs associated with welfare provision and state consumption. Additionally, there is a predominant political focus on price stability and the advantages of currency stability combined with a favourable 'real' exchange rate (which is generated by lower rates of inflation than in target export markets. The policy architecture of the euro zone serves this set of preferences through the independence of the ECB and the primacy of counterinflationary monetary policy over other macroeconomic goals. In the absence of fiscally driven growth stimuli, the ECB has pursued a policy of benign neglect in maintaining a generally low level of central bank refinancing. The November Report of the ECB thus underscores the persistence of historically favourable credit market conditions as the basis for an expected recovery of both investment and household spending within the euro zone in the coming year. Rate moves. However, with euro zone inflation edging upwards and, above all, with the persistent overshoot of money supply (M3) growth far beyond the ECB’s declared targets, it is likely that the ECB made the first of a number of minor upward shifts in
4
the refinancing rate at its last meeting. Given the acknowledged weakening of euro zone growth and the downward revision of growth forecasts for next year, there is a real danger that such rate moves will negatively affect small and medium-sized enterprises (SMEs). SMEs are far more vulnerable to changes in short-term rates than larger European corporations, whose cash reserves have rendered them relatively immune to the effects of interest rate manipulation. Euro zone fiscal policy, even after minor changes to the Stability and Growth Pact, remains locked into an anti-inflationary imperative that effectively excludes the possibility of concerted short-term anticyclical measures. In the short term, the structural reform of the euro zone’s labour markets will also have a negative impact on household demand as the primary vehicle of economic activity. This places an inordinate burden on the increasingly blunt monetary policy instruments. CONCLUSION The euro zone will continue to grow at a level insufficient to reduce unemployment and its associated social costs. Only a reappraisal of its currently dysfunctional policy architecture will break the current cycle of low growth and mass unemployment.
OUTLOOK FOR 2006
Russian Oil Slowdown Set to Spread
1
Experts from Oxford Analytica, Oxford
ussia’s economic growth will remain high by international standards – although not as high as it was in 2000–2003 – and is set to slow even further in the long run. Real GDP will continue its growth rate of about 6 per cent in 2006, as external circumstances remain favourable.
R
KEY INSIGHTS GDP is likely to continue to grow by 6 per cent due to favourable external circumstances. ➙ The direct effect of the slowdown in the oil and gas sector on overall economic growth will be rather modest in the short run. ➙ In the long run, low investment and output growth in the oil industry will have a profound negative effect on the economy and hamper diversification. ➙ Massive inflows of funds from high oil prices will make inflation difficult to control. ➙ Political infighting within the Kremlin will make economic policy making increasingly incoherent. ➙
Short-term risks of deteriorating performance are, however, more pronounced than a simple projection from current trends suggests. Growth looks more likely to slow than to accelerate over the next two to five years. The main challenges for the economy in 2006 will be: ● ●
controlling inflation; establishing a secure business environment favourable to investment; and
●
developing internationally competitive lines of production outside oil, gas and metals.
Investor worries The conventional view in relation to GDP and investment growth is that the Russian economy is back on track after a brief period of uncertainty. The growth of fixed capital investment, which slowed noticeably in late 2004 and early 2005, has since picked up. The slowdown reflected two developments that dampened business confidence, namely: ●
●
the Yukos affair, which raised doubts about property rights, particularly in the natural resources sector; and a higher tax burden on the oil industry.
Since early 2005, confidence has improved and investment growth has accelerated again. Yet, contrary to the conventional view, the revival of confidence has been incomplete. The following two indicators make this clear: ● ●
the Russian corporate sector has been putting increasing amounts of capital offshore; and investment in the fundamentally important oil industry has slowed markedly and remains sluggish – unlike investment in other sectors.
Falling oil growth. Investment and output growth in the oil industry have slowed to a crawl. Extractive
5
EUROPE AND THE CIS industries as a group exhibited only 1.0 per cent year-on-year output growth in the first ten months of 2005 and crude oil extraction for the same period increased by a mere 2.2 per cent. This is in marked contrast with the previously recorded growth of around 10 per cent per year. The direct effect of the oil and gas sector on Russia’s economic growth in recent years has been much less than some studies have claimed; it is the longer-term and indirect effects that matter more: ●
●
6
Short-term implications. The sector has accounted directly for only about one-seventh of GDP growth. Therefore, the slowdown in the oil industry will have a very limited short-run effect on the overall performance. Long-term implications. Indirect effects and longer-term implications will be significant. Russia’s economic growth has been oil-fuelled in the sense that oil has brought sharply increased financial inflows into the country. They have fed oil-industry orders for materials and equipment to other industries, and some rechannelling of funds into the development of the services and other sectors has taken place. They have also had multiplier effects, with oil tax revenue, for example, helping to boost the incomes and spending of state employees. Therefore, a prolonged slowdown in the oil industry will tend, with a time lag, to reduce growth elsewhere in the economy.
Inflation. The Central Bank of Russia (TsBR), which originally aimed for an 8.5 per cent increase in consumer prices in 2005, has now revised its target to 11–12 per cent. The main problem has been the inflow of funds from high oil prices, which has harmful as well as beneficial effects on the economy – harmful when the resulting growth of money supply exceeds the growth in the demand for money, resulting in inflation. The fact that the Russian corporate sector continues to channel a large – and recently increasing – amount of capital offshore helps to alleviate the inflationary effect of monetary inflows, which remain, on balance, very large. Budget surpluses and additions to the Stabilization Fund
Russia: Central Bank scenarios % growth, year-on-year 2005 GDP growth Investment growth Reserves growth M2 demand growth
5.9 9.8 48.5 21.3
2006, Urals 2006, Urals oil US$50 oil US$60 6.0 12.0 42.6 22-25
6.1 12.1 59.7 25-28
Source: TsBR/Vedomosti
lessen the impact of rising export earnings on the domestic money supply, but they do not cancel it out. The TsBR has been trying to slow the real appreciation of the rouble, but that, in turn, hampers inflation control. The burden of containing inflation falls mainly on fiscal policy. Risk assessment. A danger of inflation is heightened rather than reduced, damaging consumer and producer confidence: ●
●
This is likely to happen if federal budget noninterest spending is pushed up higher than the 16.4 per cent of GDP currently planned for next year. The risk is that political pressures for more spending will prove irresistible in the runup to the 2007 parliamentary and 2008 presidential elections. An oil price of US$60 per barrel in 2006 would be less favourable than an average of US$50. According to TsBR calculations, the higher price lifts real GDP only marginally but adds dramatically to money supply, through the growth in gold and forex reserves. At the same time, it adds only modestly to the demand for money (the TsBR’s calculation is of the demand for M2).
Business environment. The Russian investment climate looks strikingly different when assessed from the perspective of foreign investors and Russian business. Foreign bank lending and foreign direct investment (FDI) into Russia have increased sharply this year. The gross outflow of Russian funds has also increased, although some offshore Russian money has returned, if judged by the share
RUSSIAN OIL SLOWDOWN SET TO SPREAD of Cyprus in the stock of all inward investment (18.2 per cent on 1 October 2005). Foreign business has been seemingly reassured by President Vladimir Putin’s statements as well as by the absence of a second Yukos affair. Russian business, especially in that part of the natural resource sector that is still in private hands, remains cautious. It will require a longer period of stability in the rules of the business game for domestic business confidence to recover fully. The approaching presidential election makes such stability less certain. Meanwhile, fixed investment remains below 20 per cent of GDP: not high enough for rapid growth to be sustained in the long run. Competitiveness. A World Bank report published in November on the Russian economy stresses real appreciation of the rouble, with its potentially damaging effect on the competitiveness of non-oil sectors in Russian industry. The current real exchange rate is comparable to its July 1998 level – that is, the level it reached just before the financial crisis and the devaluation. If measured by producer prices, the rouble’s real exchange rate is appreciating faster than the TsBR’s measurements indicate. In addition, inward FDI is predominantly in either oil and gas or the service sector, and does not therefore significantly contribute to technology and management gains in non-energy tradeables. Competitiveness outside the energy sector will remain low for at least five to ten years. Policy making. Conflicts between statists and liberals among the Russian decision-making elite continue to hamper economic policy making. The liberals are concentrated in the ministries of finance and economic development, while the statists are influential in a number of other ministries and the presidential administration.
Russia: GDP and fixed investment % change, year-on-year
20 15 10 5 0
1
–5 GDP
Fixed investment
–10 –15
1997 1998 1999 2000 2001 2002 2003 2004 2005e 2006f Source: Rosstat/Troika Dialog
The statists fall into two groups – siloviki (members or former members of the military or security services) and technocrats – that are united in their dislike of free markets and economic openness for contemporary Russia. However, they are in conflict over: ● ●
the extent to which the state should control the market; and who exactly should control – or be allowed to control – particular state assets.
The political strength of both groups in Putin’s presidential administration has been increasing, and economic policy, already in turmoil, will become increasingly vulnerable to political infighting. Furthermore, disagreements over the choice of Putin’s successor will emerge as a major source of distraction and potential conflict in policy making. CONCLUSION Damaged by state action, the oil industry will not easily return to its recent dynamism, with profound negative implications for the rest of the economy. Downside risks remain and will increase in the runup to the 2007–2008 electoral cycle.
7
The Range of Country @ratings in Europe and the CIS Sylvia Greisman, Jean-Louis Daudier, Dominique Fruchter, Caroline Dupuis and Olivier Oechslin Coface Country Risk and Economic Studies Department, Paris
COUNTRY @RATING SCALE
HIGHEST RISK
C B
Emerging Countries A4 A3
World A2
Industrialized Countries
CIS Subsaharan Africa
Latin America Near and Middle East
Central Europe Emerging Asia
European Union (15) A1
Japan North America
LOWEST RISK
The regional country risk @rating represents an average of country risk @ratings weighted according to the ir contribution to the region’s production.
8
Country @ratings measure the average level of short-term non-payment risk associated with companies in a particular country. They reflect the extent to which a country’s economic, financial and political outlook imfluences local companies’ financial commitments. They are, thus, complementary to @rating credit opinions on companies. In Western Europe, companies were generally able to cope with less buoyant economic conditions and strong pressure on margins caused by rising oil and raw material prices. The brighter outlook for 2006 and improvement in German company solvency – with Germany upgraded from A2 to A1 – have been responsible for the drop in average risk for the region. That risk nonetheless still exceeds the average for all industrialized countries taken together, mainly because of payment difficulties registered in Italy.
Benefiting from the euro depreciation’s delayed effects, exports will be the main drivers of stronger growth in 2006. Investment, meanwhile, should be more dynamic with companies continuing their equipment renewal efforts. Barring a downturn in property prices, moderate household consumption growth should continue with companies thus benefiting from a more propitious economic environment. However, although growth rates may be converging, the European continent’s heterogeneity as regards economic activity will remain significant. Moreover, the companies most exposed to competition from emerging countries and those that are big oil users will again have to contend with intense pressure on their margins. In Central Europe, companies coped without major difficulty with the growth slowdown and oil price increases in 2005. Payment incident frequency remained moderate, despite a slight increase often linked to fierce competition in the distribution sector. Growth should accelerate further in line with the recovery in European demand. The average risk level expected on companies will be stable in 2006. The improvement in risks in Romania, with its rating upgraded from B to A4, offset the negative risk trend in Hungary attributable to significant risk of a sharp exchange rate depreciation. In that respect, the admission of seven of the ten new Union members in the European ERM2 exchange-rate mechanism, paving the way to possible adoption of the euro between 2007 and 2009, has bolstered the monetary stability of small Central European countries. That has remained a more distant
THE RANGE OF COUNTRY @RATINGS IN EUROPE AND THE CIS Central Europe Econom ic grow th and credit risk
EU-15 Economic growth and credit risk 7%
300
6%
250
300
6%
250
5%
5%
200
4% 3% 2%
0%
3%
100
2%
0 1997
1998
1999
2000
2001
2002
2003
2004
2005 (e)
2006 (f)
prospect, however, for the region’s three leading economies: Poland, the Czech Republic and Hungary. That delay will maintain the exchange-rate risk associated with their currencies. In Turkey, growth has returned to a more reasonable pace. Furthermore, the government’s financial situation has continued to improve. The payment experience registered by Coface for Turkish companies is still satisfactory. However, a widening current account deficit has been fuelling a disturbing level of exchange risk. Further east, many CIS economies have been enjoying economic and financial situations buoyed by rising oil and raw material prices. The level of risk in the region has nonetheless remained substantially above the emerging country average amid a stilldeficient business environment and a political climate not very conducive to reforms. In Russia, despite high oil prices, growth has slowed moderately. Although companies have consolidated their financial situations, they are still characterized by a lack of transparency. Countries rated A1 A very stable political and economic situation has a favourable influence on generally good company payment behaviour. A satisfactory legal framework moreover ensures creditor protection and collection procedure effectiveness. That globally favourable environment does not, however, preclude either growth disparities or occasional payment defaults. In Germany, a moderate economic upturn should develop in 2006. Exports will grow, buoyed by the positive impact of the recent euro depreciation and improved economic conditions in the euro zone. Investment will continue to be the main driver of domestic demand. Despite moderate economic growth, company solvency has become
200
4%
150
50
1%
■
7%
150 100 50
1% 0%
0 1997
1998
1999
2000
2001
2002
2003
2004
2005
2006 (p)
satisfactory again with payment incident frequency returning to low levels. Margins have recovered thanks to delocalizations, wage moderation and rationalization of the tools of production. The improvement has been more marked for exportoriented companies focusing on exports or possessing production facilities abroad than for those focusing on a domestic market, still facing sluggish public and private consumption. That good level of solvency should persist in 2006. In Spain, growth is still dynamic, buoyed mainly by domestic demand, notably household consumption. Low interest rates and property prices have been sustaining that dynamism, which a sudden market downturn could nonetheless jeopardize. Barring such a shock affecting growth, company solvency should continue to improve in 2006 with payment incident frequency stabilizing at a low level. However, the loss of export competitiveness caused by inflationary pressures and stiff competition from Central European and Asian countries could be responsible for difficulties in sectors like textiles, home appliances or car industry subcontractors. In France, after the slowdown in past years, growth will accelerate moderately in 2006 buoyed by the recovery of exports, which should benefit from the euro depreciation and German economic upturn. Several factors will continue to fuel domestic demand, notably job growth, the continued decline of mass distribution prices and tax cuts. Deterioration of company solvency in 2005 concerned, in particular, companies suffering most from competition with emerging countries as well as small service companies and retail. Large groups with solid financial situations and geographically diversified operations have performed relatively well in a less favourable environment. A slight decline in payment incidents should accompany the economic recovery in 2006.
1
9
EUROPE AND THE CIS In the United Kingdom, the marked economic slowdown in 2005 should give way to a moderate recovery fuelled by public and private investment and a positive foreign-trade contribution to growth. After several years of dynamic expansion, however, companies will have to adjust to more moderate business volume growth. Payment incident frequency has remained below the European average despite industry’s vulnerability to international competition and the difficulties experienced by the weakest players in the distribution sector. The financial and business-to-business services sectors, conversely, have continued to post strong growth that has bolstered the financial situation of sector companies. Countries rated A2 Default probability is still weak even in the case when one country’s political and economic environment or the payment record of companies is not as good as in A1-rated countries. In Hungary, economic activity was relatively strong in 2005, buoyed by investment and exports. It should accelerate slightly in 2006, spurred by public spending in the run-up to elections. Although company solvency has remained good
■
overall, the country’s economic fundamentals have deteriorated. Public sector accounts have accumulated imbalances, making it difficult to foresee fiscal policy, and the public debt burden has increased. The country’s admission to the euro zone in 2010 thus appears very hypothetical at this juncture. The persistence of the government’s poor financial condition and high external deficits have increased the risk of a forint collapse. In Italy (rated A2 with negative watchlist status for domestically oriented companies and A3 for export companies), payment incident frequency has remained far above the European average. This has been particularly true for export companies, which have been suffering from sectoral and geographic specialization, exposing them to fierce competition from Asian countries. The situation of domestically oriented companies has been relatively better. Better protected, especially in the services, distribution and building sectors, they nonetheless have to contend with sluggish household demand. Exports will be the main driver of the moderate recovery expected in 2006, benefiting from more favourable economic conditions in Europe and the euro depreciation. Household consumption will
COFACE MAP OF COUNTRY @RATINGS
TURKEY
10
THE RANGE OF COUNTRY @RATINGS IN EUROPE AND THE CIS only increase moderately and companies will still not significantly increase their investments, although it has especially been the inadequacy of their research and development spending that has undermined their competitiveness. Their solvency should thus remain shaky in 2006. In the Czech Republic, economic growth should continue in 2006, underpinned by exports and, in the run-up to legislative elections, accommodating fiscal policy. Thanks to good sales performance abroad, external accounts have been improving whereas profit repatriation by foreign companies has continued to put pressure on the current account deficit. Although a persistently high fiscal deficit has been another element of weakness, public sector debt has remained within reasonable limits. On the microeconomic level, companies have improved their competitiveness due, notably, to the extent of foreign direct investment (FDI) Their payment behaviour should thus remain satisfactory. Countries rated A3 Adverse political or economic circumstances may lead to the worsening of a payment record that is
■
already lower than the previous categories, although the probability of a payment default is still low. In Poland, growth sagged in 2005 amid a domestic demand and export slowdown. Company solvency remained good overall. However, competitive pressures, particularly in the distribution sector, can cause payment incidents. In 2006, higher real wages, an improved job market and low interest rates should spur consumption and investment. Consolidating government finances still constitutes a challenge crucial to the country’s prospective admission to the euro zone. Meanwhile, although the current account deficit has narrowed, higher debt amortization has kept external financing needs at appreciable levels. In Slovakia, economic conditions have remained buoyant, underpinned in particular by company investment in the export manufacturing sector. In that context, company solvency has been globally satisfactory. With the favourable trends on inflation and public sector finances and having joined the European exchange rate mechanism in November 2005, the country should be ready to adopt the euro by 2009 or even 2008. The current account deficit widened due to increases in imports
1
COFACE MAP OF MEDIUM- AND LONG-TERM COUNTRY RISK
TURKEY
11
EUROPE AND THE CIS and foreign-company profit repatriation. However, FDI will spur exports in 2006. Countries rated A4 An already patchy payment record could be further worsened by a deteriorating political and economic environment. Nevertheless, the probability of a default is still acceptable. Romania (whose rating was upgraded to A4 in 2005) has posted enviable growth performance even if a slowdown has developed due to floods, slower export growth and increased demand for imported goods. Although company payment behaviour has certainly been characterized by frequent delays, they often result in collections. The external account deficit has widened. However, capital inflows, notably FDI, have increased, generating a sharp rise in foreign exchange reserves. Moreover, foreign debt has been at sustainable levels. The country should join the EU no later than early 2008. Although the progress made on justice and competition policy has been encouraging, there are still shortcomings to remedy, particularly as regards improving civil service capacity and combating corruption. ■
Countries rated B An unsteady political and economic environment is likely to affect further an already poor payment record. In Russia, economic growth has slowed moderately despite high oil prices. The instability of
■
12
property rights has had a negative impact on oil sector expansion. Moreover, the industry has not been competitive enough. The government financial situation has continued to improve, as have company solvency and payment behaviour. Company financial transparency and shareholder rights still leave much to be desired. Governance continues to be the country’s main weakness, particularly as regards corruption and the functioning of the legal system. The banking sector has remained vulnerable to an economic downturn and a loss of confidence by depositors, despite the step forward that the deposit insurance law represents. Although the country has been very stable politically, the increasing centralization of power could make reform implementation ineffective. In Turkey, economic growth returned to a pace more sustainable than the exceptional levels reached in 2004. Moreover, inflation has been under control, despite higher oil prices. Company payment behaviour is thus still satisfactory with the number of payment incidents remaining stable and below the world average. The progress made since the 2001 crisis has been remarkable, especially concerning disinflation, public sector finances and banks. The country’s large external financing needs, which have been growing due to oil prices and company investment, now constitute the main source of concern. Since volatile capital still covers most of those needs, foreign exchange risk has been high with the country exposed to swings in foreign investor and lender sentiment, currently favourable to Turkey.
ALBANIA
Albania Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
3.2 6,124 1,914
1
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT Economic activity was robust in 2005 thanks to buoyant domestic demand and the good performance of the services, construction and farm sectors. The rapid credit expansion, increased inflows of workers’ remittances and continued public sector investment should continue to underpin growth in 2006. Although the macroeconomic situation has stabilised, major structural weaknesses have persisted. The economy has remained very dependent on agriculture (24 per cent of GDP). Exports are still focused on textiles and footwear (two-thirds of total sales abroad); that
subcontracting industry is subject to the Italian demand trend and increased competition from other low-cost producer countries. Deficient infrastructure and a poor institutional environment have impeded development. With one of Central Europe’s poorest economies, Albania has suffered from very high unemployment. The new centre-right government has begun to reduce the company tax burden and has undertaken to combat corruption and organised crime. Strengthening ties with the European Union, with which Albania has been negotiating a Stabilization and Association Agreement since 2003, has also been a priority.
MAIN ECONOMIC INDICATORS US$ millions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2005(e)
2006(f )
2001
2002
2003
2004
7.2 3.1 -7.9 305 1,332 -1,027 -6.4 29.3 2.3
3.4 5.2 -6.6 330 1,485 -1,155 -9.7 26.3 3.8
6.0 2.4 -4.4 447 1,783 -1,336 -8.1 24.6 2.7
5.9 2.9 -5.0 603 2,182 -1,579 -6.0 22.0 2.6
6.0 2.1 -4.5 766 2,699 -1,933 -7.1 20.0 3.3
6.0 3.0 -4.2 932 2,987 -2,055 -7.0 20.1 4.1
4.9
4.9
4.7
5.0
4.4
4.4
13 e = estimate, f = forecast
EUROPE AND THE CIS
Armenia Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
3.1 2,805 905
Short-term: C
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT The economic dynamism continued in 2005 with double-digit growth for the fourth consecutive year. Investment and the influx of transfers from Armenians living abroad have spurred domestic demand with inflation easing, thanks to good harvests. Armenia has suffered less than other countries from the rising energy prices thanks to an agreement with Russia on gas supply and to a nuclear power plant, originally hydroelectric, (contested by the West for security reasons) that supplies 40 per cent of its electricity. Finally, the country’s fiscal and monetary policies have remained sound allowing it to benefit from IMF and World Bank backing.
Trade with Europe has been substantial. However, Armenia’s relations with Russia have remained fundamentally important with its large neighbour controlling the energy sector and maintaining bases on its territory. Armenia considers those bases as essential due to the persistence of its dispute with Azerbaijan over Nagorny Karabakh. The country’s landlocked status, a result of that conflict exacerbated by Turkey’s support for Azerbaijan on that issue, has impeded its development. The business environment has also not been conducive to foreign investment, especially with domestic political tensions remaining high.
MAIN ECONOMIC INDICATORS 2005(e)
2006(f )
US$ millions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
9.6 2.9 -3.8 342 773 -431 -13.4 45.0 9.7
12.9 2.0 -0.4 514 883 -369 -6.3 42.7 10.5
13.9 8.6 -1.1 696 1,130 -434 -6.8 43.4 11.6
10.1 2.0 -1.7 738 1,196 -458 -4.5 39.1 6.5
11.0 1.5 -2.4 904 1,458 -554 -3.9 33.2 6.5
7.5 3.0 -2.9 1,033 1,640 -607 -4.1 26.8 6.5
3.6
3.7
4.1
3.7
3.7
3.7
14 e = estimate, f = forecast
AUSTRIA
Austria Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
Coface analysis
8.1 294,300 36,000
1
Short-term: A1
RISK ASSESSMENT Despite an incipient second-half recovery, economic growth slowed in 2005. The income tax reduction proved insufficient to spur households to increase spending. They have had to contend with higher energy costs and rent, as well as increased unemployment attributable to an increase in the working age population. Company investment also stagnated as a repercussion of the expiry of tax breaks. Neither Austria’s good positioning in southeastern Europe and the CIS nor the favourable impact of Germany’s export revival on intermediate product sales has sufficed to prevent Austrian exports from slowing in phase with economic conditions in the euro zone.
The recovery should continue in 2006 considering the improved growth trends for all demand components are in a still-favourable monetary and fiscal context. Households will take advantage of easing inflation and additional income tax reductions to moderately increase their spending. New road and rail infrastructure spending will take place while companies, encouraged by the reduction of corporate tax and a brighter outlook, will undertake additional productive investments. Exports will also become more dynamic thanks to Western Europe’s improved economic conditions and the euro depreciation’s positive impact. Company bankruptcies increased substantially again in 2005 (up 16 per cent). The resulting amount of liability nonetheless declined (down 12 per cent)
MAIN ECONOMIC INDICATORS %
2001
2002
2003
2004
2005(e) 2006(f )
Economic growth Consumption (var.) Investment (var.) Inflation Unemployment rate Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)
0.9 1.0 3.0 2.3 3.6 4.3 0.1 70.2 6.8 5.0 -1.9
1.0 0.4 -4.3 1.7 4.2 3.3 -0.4 71.9 3.3 1.3 0.4
1.4 1.4 6.4 1.3 4.3 2.3 -1.3 69.7 2.8 4.8 -0.4
2.4 0.8 2.9 2.0 4.8 2.2 -1.0 68.0 9.0 6.2 0.3
1.8 1.3 0.0 2.3 5.1 2.0 -1.9 67.0 4.2 2.8 0.2
2.1 1.8 4.0 1.8 4.9 2.3 -1.9 67.0 5.5 5.2 0.3
15 e = estimate, f = forecast
EUROPE AND THE CIS with the failures mainly concerning small or oneperson companies concentrated in services, the restaurant-catering sector and building-industry light work. The Coface payment incident index, which
considers the amounts involved, thus remained at a good level. In 2006, the economic recovery should bolster the company financial situation and prompt a decline in bankruptcies.
PAYMENT AND COLLECTION PRACTICES
Debt collection As a rule, the collection process begins with the debtor being sent a demand for payment by registered mail, reminding him or her of the obligation to pay the outstanding sum plus default interest in accordance with the sales agreement. Where there is no interest rate clause in the agreement, the rate of interest applicable from 1 August 2002 is the Bank of Austria’s base rate, calculated by reference to the European Central Bank’s refinancing rate, marked up by eight percentage points. For claims that are certain, liquid and uncontested, creditors may seek a fast-track court injunction (Mahnverfahren) from the district court via a pre-printed form. The competent district court for this type of fast-tract procedure expedites the requisite action for ordinary claims up to €30,000 (previously €10,000) based on an amendment to the civil procedure code (ZPO) in effect since 1 January 2003.
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16
With this procedure, the judge will issue an injunction to pay the amount claimed plus the legal costs incurred. If the debtor does not appeal the injunction (Einspruch) within two weeks of service of the ruling, the order is enforceable relatively quickly. A special procedure (Wechselmandantverfahren) exists for unpaid bills of exchange under which the court immediately serves a writ ordering the debtor to settle within two weeks. Should the debtor contest the claim, the case will be tried through the normal channels of court proceedings. Where no settlement can be reached, or where a claim is contested, the last remaining alternative is to file an ordinary action (Klage) before the district court (Bezirksgericht) or the regional court (Landesgericht) depending on the claim amount or the type of dispute. A separate commercial court (Handelsgericht) exists in the district of Vienna alone to hear commercial cases (commercial disputes, unfair competition suits, insolvency petitions etc). During the preliminary stage of proceedings the parties must make written submissions of evidence and file their respective claims. The court then decides on the facts of the case presented to it, but does not investigate cases on its own initiative. At the main hearing, the judge examines the evidence submitted and hears the parties’ arguments as well as witnesses’ testimonies. An enforcement order can usually be obtained in first instance within about 10–12 months. PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
250
WORLD Austria
200
150
100
50
0
Ju ne 9 D 3 ec Ju 93 ne 9 D 4 ec Ju 94 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 97 D ec Ju 97 ne 9 D 8 ec -9 Ju 8 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 01 D ec Ju 01 ne 0 D 2 ec Ju 02 ne 0 D 3 ec Ju 03 ne 0 D 4 ec Ju 04 ne 05 D ec -0 5
Payment Bills of exchange and cheques are neither widely used nor recommended, as they are not always the most effective means of payment. To be valid, bills of exchange must meet strict criteria. This deters business people from using them. Cheques need not be backed by funds at the date of issue, but must be covered at the date of presentation. Banks generally return bad cheques to their issuers, who may also stop payment on their own without fear of criminal proceedings for misuse of this facility. Bills of exchange and cheques are more commonly employed for repayments where the counterparties have agreed to their use. Conversely, SWIFT transfers are widely used for domestic and international transactions and offer a cost-effective, rapid and secure means of payment.
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AZERBAIJAN
Azerbaijan Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
8.2 7,138 870
1
Short-term: C
Coface analysis
Medium-term: High risk
RISK ASSESSMENT The country has benefited from high hydrocarbon prices. A substantial increase in oil export volumes has particularly contributed to the excellent economic and financial conditions enjoyed by the country. FDI and revenues derived from the Baku–Tbilisi–Ceyhan (BTC) pipeline now linking Azerbaijan to Ceyhan in Turkey have made the increased volumes possible. The country should run a comfortable current account surplus starting this year, and its debt ratios have been declining rapidly amid strong export and GDP growth. The growing dependence on hydrocarbons will nonetheless be a medium-term weakness with the
flow of oil export income hardly conducive to reforms. The political environment and governance in particular have remained major weaknesses. The legitimacy of President Ilham Aleev, who succeeded his father, has been called into question by the opposition and the legislative elections in November 2005 were hotly contested. Unsatisfactory governance and very uneven sharing of oil export income have been a source of vulnerability in a country rife with corruption. Moreover, the conflict with Armenia over the Nagorny Karabakh question has been another element of uncertainty.
MAIN ECONOMIC INDICATORS US$ millions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2005(e) 2006(f )
2001
2002
2003
2004
9.9 1.5 -0.4 2,046 1,465 581 -1 22.8 5.1
10.6 2.8 -0.5 2,305 1,823 482 -12 24.2 5.8
11.2 2.1 -0.5 2,625 2,723 -98 -28 23.3 7.4
10.2 6.7 -1.2 3,743 3,582 161 -30 22.4 6.3
21.0 12.0 0.4 6,088 4,656 1,432 -13 18.5 4.6
25.0 9.0 1.0 11,863 4,796 7,067 22 15.2 2.8
3.5
2.8
1.6
1.8
1.6
1.7
17 e = estimate, f = forecast
EUROPE AND THE CIS
Belarus Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
9.9 17,493 1,767
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT Thanks to demand stimulation policy and a good external environment, the country’s macroeconomic performance has improved with accelerated economic growth and public sector accounts back in balance. Price controls and the exchange rate peg have contributed to bringing inflation down. Continuing that policy, however, could undermine the still centrally controlled economy. Without reform, a slowdown will be likely. Wage growth has outstripped productivity gains, lossmaking companies are still numerous, and the main banks need frequent recapitalization. In coming
years, the aging population will burden the health and pension systems. Moreover, the current accounts have been in deficit with foreign exchange reserves remaining low. Lacking access to financial markets, the country thus has little foreign debt. Meanwhile, President Lukashenko continues to dominate the political scene with his regime tightening its grip in the run-up to presidential elections in 2006. The country still enjoys support from Russia including financial aid and privileged access to the Russian market in a customs union framework. The two countries have, however, postponed forming a monetary union.
MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ millions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
4.7 61.1 -3.1 7,334 8,141 -807 -3.2 19.8 7.4
5.0 42.6 -1.9 7,965 8,879 -914 -2.1 21.1 6.9
7.0 28.4 -1.1 10,073 11,329 -1,256 -2.4 18.8 8.6
11.0 18.1 0.0 13,917 15,983 -2,066 -4.6 18.7 7.1
7.1 12.1 -0.5 15,743 17,950 -2,207 -3.7 18.5 7.6
4.0 12.5 -1.0 17,084 19,424 2,340 -3.4 19.7 7.1
0.5
0.6
0.5
0.5
0.7
0.7
18 e = estimate, f = forecast
BELGIUM
Belgium Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
Coface analysis
10.4 352,300 33,878
1
Short-term: A1
STRENGTHS ● Multiculturalism and multilingualism, fostered by its geographic position and the presence of European institutions, have facilitated the installation of foreign companies and trade relations in general. ● Located in the heart of Europe’s main business area, Belgium is the crossroads of many communication channels whether road, rail or water transport. ● With the country’s solid position in intermediate goods, its external accounts have been in surplus. ● The fiscal consolidation, in progress for several years now, has fostered gradual reduction of public sector debt.
RISK ASSESSMENT Faltering economic activity marked 2005 due to a loss of dynamism by both exports and household consumption. Fiscal equilibrium was maintained at the expense of cutbacks in government spending, particularly on health. However, after several years of stagnation, even contraction, companies have begun to invest again. Economic growth should accelerate in 2006, buoyed by a progressive export and consumption recovery. Exports will benefit from stronger European demand despite an erosion of competitiveness. Household spending should also recover, spurred by an increase in available income resulting from tax reform. Improved domestic and
WEAKNESSES By limiting central government prerogatives, regionalization has complicated matters in reducing regional disparities. ● Productivity has suffered from a lack of competition in network industries and retailing, as well as from a mismatch between sectoral/regional wage agreements and individual company situations. ● The education system’s shortcomings and certain social arrangements have contributed to keeping unemployment high, particularly with a low employment rate for youth and the oldest working-age citizens. ● The shaky fiscal equilibrium has rested on nonrecurring measures and will be insufficient with the aging of the population. ●
foreign demand will buoy private investment, which should remain dynamic. Concurrently, public investment will benefit in the run-up to the next municipal elections. The fiscal equilibrium objective will be essentially met, despite slight deterioration attributable to tax and socialcontribution reductions. Although gradually declining, public sector debt will nonetheless remain high. The Coface payment incident index is still far below the world average. The increase in bankruptcies has given way to stabilization, even if companies have suffered from the upsurge of energy and raw-material prices. Risks have nonetheless persisted in some sectors, like textiles, retail,
19
EUROPE AND THE CIS MAIN ECONOMIC INDICATORS %
2001
2002
2003
2004
Economic growth Consumption (var.) Investment (var.) Inflation Unemployment rate Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)
1.2 1.2 3.6 2.4 6.7 4.3 0.5 113.5 1.0 0.2 3.4
1.5 0.8 -2.8 1.6 7.3 3.3 0.0 110.4 1.0 0.2 4.6
0.9 1.0 -1.9 1.5 7.9 2.3 0.2 104.9 2.8 2.9 4.2
2.4 1.3 3.3 1.9 7.9 2.1 0.0 95.7 5.6 6.3 3.4
2005(e) 2006(f ) 1.3 1.1 5.4 2.5 8.0 2.2 0.0 93.6 1.3 3.5 3.2
1.9 1.5 4.2 2.4 8.0 2.2 -0.4 90.8 3.5 4.3 3.2
e = estimate, f = forecast
transport and chemicals. In 2006, improved economic conditions and still-accommodating
financing terms should bolster the company financial situation, particularly in construction.
MAIN ECONOMIC SECTORS Construction Implementation of renovation programmes, a shift from financial to real property investments, and maintenance of accommodating long-term financing agreements buoyed growth in 2005. In 2006, those growth factors will persist with the upcoming municipal elections fostering publicsector investment in infrastructure projects. A strengthening climate of confidence in civil engineering augurs for a bright outlook.
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Chemicals In 2005, business activity was less buoyant amid weak European demand and a consumption slowdown. There were nonetheless substantial disparities between the various sub-sectors. The segments experiencing the most difficulty included basic inorganic chemistry, petrochemicals and plastics. Virtually nil growth also affected fine chemicals. Conversely, sub-sectors like chemical products intended for pharmaceuticals, perfumes and cosmetics sustained their dynamism. In 2006, the situation should remain uneven. However, a likely overall decline in conditions in the sector will not be very beneficial to company solvency.
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20
Textiles In 2005, the end of the multifibre arrangement led to an influx of Chinese products. Reintroduction of quotas has not prevented conditions from deteriorating in the clothing textiles industry, including technical textiles and the carpet and rug segment, spared until then. Although exports were steady within the EU, they declined elsewhere. Conversely, imports coming from the EU declined to the benefit of China, India, Bangladesh and Pakistan. The decline of prices linked to imports (about 10 per cent) has not, however, been passed on to consumers. Meanwhile, companies in the sector had to reduce their investments and undertake restructuring programmes. In 2006, the reduction of investment spending should continue. Exports should nonetheless benefit from the recovery of European demand for higher value-added products.
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Food In 2005, business activity declined substantially amid reduced household spending. Domestically, retail food product sales thus tended to sag. Two subsectors underwent marked declines: sugar and fats and margarine. Conversely, food-product exports
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BELGIUM have been increasing, mainly to the EU. Imports have been steady, marked by the rapid development of two supplier countries: Poland and Estonia. Price pressure has been intense on both export and domestic sales. That trend should persist in 2006, which could affect company earnings performance. Moreover, sales should deteriorate across all subsectors. Despite a slight growth recovery in Belgium, risks will remain very high in that sector. Retail Retail growth sagged in 2005, undermined by faltering consumption. However, performance
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varied by sub-sector. Food sales were steady at department stores and fell slightly for chain stores and other outlets. Although textile sales rose in department stores and supermarkets, they sagged at chain stores. More closely tied to economic conditions, sales of consumer durables thus declined significantly. The retail trade again represented one-third of bankruptcies in the kingdom, making the sector particularly risky. In 2006, the sales decline should intensify in all subsectors. The property market’s dynamism should buoy spending on durables and refitting.
1
PAYMENT AND COLLECTION PRACTICES Payment The bill of exchange is a common means of payment in Belgium. In the event of default, a protest may be drawn up through a bailiff within two days of the due date whereby the bearer can initiate proceedings against the bill’s endorsers. The National Bank of Belgium publishes a list of protests that can be consulted by the public at the office of the clerk of the commercial court and in some business and financial newspapers (Journal des protêts, Echo de la Bourse). Such publication is as an effective means of pressuring debtors to settle disputes because of the possibility that they might be refused credit by banks and suppliers. Cheques are commonly used, but to a lesser extent than bills of exchange. Issuing uncovered cheques is a criminal offence. The Belgian public prosecutor’s office is frequently willing to press criminal charges for claims over €5,000. Uncovered cheques (like protested drafts) are equivalent to an acknowledgement of debt and, when needed, can be used to obtain an attachment order. Although bank transfers are the fastest means of payment (all major Belgian banks use the SWIFT system), they do not offer a foolproof guarantee of payment as the transaction is very much dependent on the buyer’s good faith. They should, therefore, be used where background financial information on the buyer is available to the seller.
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Debt collection Out-of-court collection begins with formal notice addressed to the debtor by recorded-delivery letter requesting that the debtor pay with 10 days the outstanding principal, plus past-due interest or application of a penalty clause (clause penale) stipulated in the terms and conditions of sale. In the absence of a prior contractual agreement, interest on an unpaid invoice is automatically applicable from the day following the due date at a six-monthly rate set by the Ministry of Finance based on the European Central Bank’s refinancing rate plus seven percentage points (the Act on ‘combating late payments in commercial transactions’ in force since 7 August 2002). Summary procedures resulting in an injunction to pay for claims under €1,860 fall within the sole jurisdiction of a justice of the peace. They must be supported by a document drawn up by the debtor pointing to the undisputed nature of the claim. But owing to their excessive formalism, summary proceedings are little used. Moreover, they require a lawyer’s signature. Where debtors refuse to settle amicably or fail to respond to a formal demand, creditors can initiate ordinary proceedings against them whereby they are summoned to appear before the court of first instance or, for overdue commercial payments, the competent commercial court. For undisputed claims, rulings are usually delivered either immediately from the bench (sur les bancs) or within a month of the final hearing.
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21
EUROPE AND THE CIS For disputed claims, proceedings can take up to two years (especially in the event of an appeal). However, under the Belgian code of civil procedure the judge may set a deadline for the submission of arguments and evidence at the request of the parties. The Bankruptcy Act of 8 August 1997 (amended by the law of 4 September 2002) and the Composition Act of 17 July 1997 – both of which came into force on 1 January 1998 – recognize retention of property rights in specific cases and circumstances. For instance, an action for recovery is only admissible if initiated before the registered list of admitted debts is drawn up (procès-verbal de vérification de créances).
Another safeguard benefiting creditors is the right granted to sellers of moveable property stipulated under article 20-5 of the 16 December 1851 mortgage law. That right concerns all durable goods employed directly in an industrial, commercial or craft activity and generally considered as ‘real estate’ by incorporation or economic destination. A creditor may act on this right during a five-year period, a debtor’s bankruptcy notwithstanding, provided he or she has registered certified true copies of invoices with the clerk’s office of the commercial court in the debtor’s district of residence, within 15 days of delivery of the goods.
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
250
WORLD Belgium
200
150
100
50
ne Ju
22
D
93 ec -9 Ju 3 ne 9 D 4 ec -9 Ju 4 ne 9 D 5 ec -9 Ju 5 ne 9 D 6 ec Ju 96 ne 9 D 7 ec Ju 97 ne 9 D 8 ec Ju 98 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 0 D 1 ec Ju 01 ne 0 D 2 ec Ju 02 ne 0 D 3 ec Ju 03 ne 0 D 4 ec Ju 04 ne 0 D 5 ec -0 5
0
BOSNIA AND HERZEGOVINA
Bosnia and Herzegovina Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
1
4.1 6,973 1,701
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT Since the 1995 Dayton Agreement, the country has made substantial progress in a context characterized by the presence of a peacekeeping force, a waiving of debts and conclusion of agreements with the IMF. GDP has tripled, exports have increased tenfold, introduction of a fixed exchange rate regime made it possible to stabilize inflation and public sector finances have partly recovered. A slight economic upturn is expected in 2006 as a result of investments made in infrastructure and the industrial sector. The financial and economic situation has nonetheless remained shaky. The unemployment and poverty rates have been high, the savings rate very low and production has not yet returned to its
pre-war level. Robust domestic demand, spurred by a credit boom, has caused imports to rise and kept the current account deficit at levels difficult to sustain in the medium term, just when international aid has been declining. Politically, the situation has not completely calmed down. Although the Dayton Agreement certainly pacified the country, it also sanctioned political division and ethnic segregation. However, on the tenth anniversary of the agreement, and under international pressure, Bosnian leaders accepted a revision of the peace treaty intended to strengthen the central government. Meanwhile, the EU announced the start of negotiations on a stabilization and association agreement.
MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ millions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
4.3 3.2 -16.0 870 2,701 -1,831 -16.1 n/a 3.7
5.3 0.3 -10.1 952 3,211 -2,259 -21.8 56.6 5.5
4.0 0.6 -6.6 1,296 3,816 -2,520 -17.8 57.1 5.2
5.7 0.4 -4.8 1,664 4,496 -2,832 -17.3 55.2 4.3
5.4 1.0 -3.0 2,072 5,195 -3,123 -16.8 52.7 4.5
5.7 1.9 -2.0 2,434 5,541 -3,107 -15.2 49.4 4.7
5.1
4.5
5.2
6.0
5.3
5.1
23 *
excluding grants
e = estimate, f = forecast
EUROPE AND THE CIS
Bulgaria Population (million inhabitants) GDP (US$ million)
7.8 19,860
Short-term: B
Coface analysis
Medium-term: Moderately high risk
STRENGTHS ● The country’s impending admission to the EU has improved the economic outlook. ● Reform implementation, tight fiscal policy and proactive debt management have made it possible to consolidate the economic situation and markedly improve government solvency. ● The banking sector emerged stronger from the 1996–1997 crisis. ● The country benefits from a skilled labour force. ● It has been attracting substantial FDI inflows.
RISK ASSESSMENT Fuelled by investment and consumption, economic activity remained robust in 2005, prompting implementation of new measures intended to slow the expansion of credit. However, the full effect of those measures should only be felt in 2006. Although the medium-term growth outlook is still good, structural weaknesses that could hamper the economy have persisted, including deficiencies in the business environment. The lagging pace of both legal system reform and the campaign against organised crime could postpone the country’s admission to the EU unless corrective measures are taken rapidly. Government finances have been in surplus with the public sector debt burden continuing to
24
WEAKNESSES Robust imports, spurred by a credit upsurge, have caused a major current account imbalance. ● The foreign debt burden, although declining, is still relatively high. ● Much progress is still needed on structural issues, particularly reforms notably concerning the business environment. ● That progress will be necessary to ensure that regular inflows of capital continue and to bolster the country’s rigid foreign exchange regime (currency board). ● The development level is still limited with domestic savings remaining insufficient. ●
decline. Sovereign risk has thus continued to improve. Financing the markedly widening current account deficit should not pose major problems considering the substantial influx of FDI. Meanwhile, however, foreign debt held by companies and banks has been growing sharply. Politically, the governing coalition between the Socialists and outgoing parties could ultimately prove weak. Despite generally good economic conditions, company payment behaviour is still characterized by frequent delays. However, the out-of-court procedures generally preferred often result in claim collection.
BULGARIA MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ millions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Unemployment rate (%) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
4.1 7.4 -0.9 19.5 5,113 6,693 -1,581 -984 -7.2 78.1 16.0
4.9 5.8 -0.6 16.8 5,692 7,287 -1,595 -827 -5.3 72.2 11.7
4.5 2.3 -0.4 12.7 7,445 9,923 -2,478 -1,676 -8.4 68.0 11.1
5.6 6.1 1.8 11.9 9,859 13,212 -3,353 -1,813 -7.5 68.1 13.3
5.7 4.5 1.0 n/a 11,670 15,896 -4,226 -2,741 -10.1 62.4 16.7
4.4 4.1 0.5 n/a 13,560 18,264 -4,704 -2,887 -9.5 62.0 8.0
4.4
5.4
5.7
6.1
5.4
5.3
1
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview A country counting roughly 7.8 million inhabitants whose standard of living – while below the 25member EU average – is rising steadily, Bulgaria has seen its per capita GDP jump from US$1,226.90 in 1997 to US$3,101.20 in 2004 (approximately €2,497.50). Income disparities – the average monthly wage in 2004 was €154.20 – is a source of frustration, exacerbated by the prospect of EU accession and the inevitable comparisons that this invites.
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Means of entry The country functions as a market economy. The banking sector has been privatized, while government monopolies in energy and telecommunications have been dismantled and their privatization nearly completed.
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Since 2002, customs duties on industrial goods traded with member states of the EU, EFTA, CEFTA, Israel, Turkey and Macedonia are nil, with a tiny number of exceptions. French companies enjoy intellectual and industrial property protection under a bilateral cooperation agreement concluded on 28 November 2003 between INPI and the Bulgarian Patents Office. Attitude towards foreign investors The country is extremely open to foreign investment. FDI, which has climbed sharply since 1992, totalled €9.84 billion at the end of June 2005. Investment inflows are expected to reach an estimated €2 billion at the year end, compared with €2.1 billion in 2004. The country has a highly investment-friendly policy towards foreign investors and everything is being done to facilitate foreign start-ups.
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25
EUROPE AND THE CIS OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 42 ■ Public spending 12 ■ Investment 13
Exports: 53% of GDP
Imports: 63% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
1200
2000
1000 1500
800 600
1000
400
500
200
0
0 Italy
Germany Greece
Turkey Belgium
Germany Russia
Italy
Greece
Turkey
IMPORTS by products ■ All food items 5% ■ Ores and metals 5% ■ Chemical products 10% ■ Other manufactured goods 30% ■ Capital goods and transport equipment 29% ■ Miscellaneous 21%
EXPORTS by products ■ All food items 10% ■ Fuels 6% ■ Ores and metals 10% ■ Chemical products 8% ■ Other manufactured goods 45% ■ Capital goods and transport equipment 13% ■ Miscellaneous 8%
STANDARD OF LIVING / PURCHASING POWER
26
Indicators
Bulgaria
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1,000 inhabitants Number of computers per 1,000 inhabitants
7,540 2,130 0.808 23.7 68 14.4 380 51.9
Regional average DC average 7,530 2,580 0.806 30 64 20 228 73.4
4,300 1,280 0.697 33 43 31 112 28.4
CROATIA
Croatia Population (million inhabitants) GDP (US$ million)
4.4 28,797
1
Short-term: A4
Coface analysis
Medium-term: Moderately high risk
STRENGTHS ● The start of accession negotiations with the EU should spur efforts on reform and foster capital inflows. ● The country has attained an advanced level of development compared with most other Balkan countries. ● Croatia’s tourism potential is substantial. ● It has built up comfortable levels of foreign exchange reserves.
WEAKNESSES The persistence of large fiscal and current account deficits has remained the country’s main weakness. ● Those deficits have caused a substantial increase in the public sector and foreign debt burdens. ● Progress on the negotiations with the EU will remain dependent on implementation of politically sensitive reforms. ●
RISK ASSESSMENT Growth benefited from the steadiness of domestic demand in 2005, buoyed by a stock replenishment process. Economic activity should continue at the same pace in 2006, driven more firmly by consumption, which should benefit from payment of pension arrears. Although the public sector deficit has remained large, authorities have, for the first time, established a medium-term budgetary framework. After shrinking in 2004, the current account deficit has begun to widen again fuelled by rising prices for imported raw materials and by increased repatriation of earnings by foreign investors. Large tourism revenues (nearly 20 per cent of GDP) have
nonetheless been limiting the size of that deficit. The worsening of that imbalance has moreover been accompanied by a sharp increase in capital inflows, notably as direct investments and repatriation of funds by local banks. That has been slowing the growth of foreign debt, which has reached high levels. In October 2005, the EU decided to begin accession negotiations with Croatia, which had been held in abeyance pending Zagreb’s full cooperation with the International Criminal Tribunal for exYugoslavia. Major reforms remain necessary, notably in the areas of government aid, state-owned-company restructuring, health and the business environment.
CONDITIONS OF ACCESS TO THE MARKET
unemployment was 13.1 per cent during the first half of 2005 (CROSTAT).The average wage in July 2005 was estimated at €587, up 3.4 per cent over the same period in 2004, with inflation at 2.9 per cent. Imports, which have climbed since borders
Market overview Out of a population of 44.4 million, the working population is 1.6 million. The average rate of
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27
EUROPE AND THE CIS MAIN ECONOMIC INDICATORS US$ millions Economic growth (%) Inflation (%) Public sector balance (%GDP) Unemployment rate (%) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2001
2002
2003
2004
4.4 4.6 -6.8 22.0 4,759 8,860 -4,101 -594 -3.0 59.7 19.5
5.2 1.7 -5.0 22.3 5,004 10,652 -5,649 -1,473 -6.5 69.1 25.8
4.3 1.8 -6.3 19.2 6,308 14,216 -7,908 -2,054 -7.1 86.6 20.4
3.8 2.1 -4.9 18.5 8,210 16,560 -8,350 -1,867 -5.4 90.0 16.2
4.8
5.0
5.2
4.8
2005(e) 2006(f ) 3.4 3.3 -4.5 n/a 9,386 18,790 -9,404 -2,374 -6.4 82.7 17.7
3.5 3.7 -4.3 n/a 10,177 20,553 10,376 3,046 -7.5 85.3 21.2
4.5
4.6
e = estimate, f = forecast
28
were opened, do not normally require prior approval, except for products regulated by international agreements (arms, gold, works of art etc) or on grounds of public health (foodstuffs etc). Accession talks with the EU started on 4 October 2005. Croatian laws are going through a screening period, although most are already in line with EU integration criteria. Croatia is due to join the EU in 2009. Customs duties have been reduced under WTO agreements as well as the free-trade agreement signed with the EU. For industrial products, the maximum tariff is 6.5 per cent (2005), but the average rate applied is around 3.8 per cent. For foodstuffs, rates vary between 2 per cent and 55 per cent under WTO arrangements, while preferential rates apply to non-quota items under the preferential system for Europe. Croatian agriculture is not yet sufficiently competitive. At Hong Kong, Croatia will ask for a grace period well beyond 2007 in order to further lower its customs duties on farm products. All means of payment are used and accepted in the country. For consumer purchases, credit cards are more widely used than cheques, which are not common. It is often possible to obtain a 10 per cent discount on cash payments. Government invoices are settled by means of giro transfers. For commercial settlements, the most widely used instruments are bank transfers and bank guarantees confirmed by a foreign bank as well as cheques drawn on a well-known local bank.
Attitude towards foreign investors The principle of national treatment is extended to foreign investors who, like local ones, have to deal with a slow and cumbersome bureaucracy. The real estate register is under review, easing uncertainty about land and property ownership rights. It is already available on the internet, with the land register due to follow shortly. The judicial system for commercial disputes is clogged with a backlog of 1.5 million cases. However, reforms are under way in the form of new labour, bankruptcy and competition legislation. Between 1993 and 2005, FDI amounted to US$11.9 billion, including US$1.1 billion in the first half of 2005. During this period, the three leading investors were Austria (25.6 per cent), Germany (17.7 per cent) and the United States (12.25 per cent), with France accounting for less than 2 per cent of volume.
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Foreign exchange regulations The national currency, the kuna, is not convertible outside the country. Foreign companies must open a foreign currency account as well as a kuna account to do business in Croatia. The central bank (HNB) has adopted a slightly overvalued exchange rate which it regulates by intervening on the currency market. The exchange rate at 21 November 2005 was 7.42 kunas to the euro.
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CROATIA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 38 ■ Public consumption 13 ■ Investment 19
1 Imports: 57% of GDP
Exports: 47% of GDP MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
2000
3000 2500
1500
2000
1000
1500 1000
500
500
0
0 Bosnia Germany Slovenia Austria Italy and Herzegovina
Italy
Germany Slovenia Austria
France
IMPORTS by products ■ All food items 8% ■ Fuels 11% ■ Chemical products 11% ■ Other manufactured goods 29% ■ Capital goods and transport equipment 37% ■ Miscellaneous 3%
EXPORTS by products ■ All food items 12% ■ Fuels 10% ■ Chemical products 10% ■ Other manufactured goods 33% ■ Capital goods and transport equipment 29% ■ Miscellaneous 7%
STANDARD OF LIVING / PURCHASING POWER Indicators
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1,000 inhabitants Number of computers per 1,000 inhabitants
Croatia
10,610 5,370 0.841 24.5 59 16.2 417 173.8
Regional average DC average 7,530 2,580 0.806 30 64 20 228 73.4
4,300 1,280 0.697 33 43 31 112 28.4
29
EUROPE AND THE CIS
Cyprus Population (inhabitants) GDP (US$ million) GDP per capita (US$)
770,000 9,373 12,173
Short-term: A3
Coface analysis
Medium-term: Low risk
RISK ASSESSMENT Stable in 2005, economic growth could slow slightly in 2006. Although expanding more slowly, domestic demand is still the main economic engine. Meanwhile, the tourism industry has continued to recover. Unemployment has remained low with inflation contained despite rising oil prices. The Cypriot pound joined ERM2 successfully in May 2005 and the government would like to adopt the euro in early 2008. Although the fiscal deficit should fall below 3 per cent of GDP in 2005 and 2006, in compliance with the convergence
programme commitments, the public sector debt burden will remain substantial (about 70 per cent of GDP) despite an incipient decline. Small and open, the economy has thus remained vulnerable to exogenous shocks. Although the external account deficit has widened, financing it via foreign direct and portfolio investments has not been a major source of concern. Meanwhile, it was a divided island that joined the EU in May 2004, after the Greek Cypriots rejected the Annan plan. The chances of success of new negotiations on reunification have remained slim.
MAIN ECONOMIC INDICATORS US$ millions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports975 Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2005(e) 2006(f )
2001
2002
2003
2004
4.1 2.0 -2.3 975 3,553 -2,577 -3.4 55.6 8.0
2.1 2.8 -4.5 855 3,703 -2,848 -4.4 71.4 6.6
1.9 4.1 -6.3 955 4,090 -3,134 -3.4 67.1 6.1
3.7 2.3 -4.1 1,175 5,218 -4,043 -5.9 67.8 5.1
3.6 2.6 -2.8 1,138 5,496 -4,358 -6.2 59.7 4.6
3.0 2.4 -2.8 1,185 5,780 -4,595 -6.1 59.5 4.2
4.4
5.7
5.4
5.2
4.5
4.7
30 e = estimate, f = forecast
CZECH REPUBLIC
Czech Republic Population (million inhabitants) GDP (US$ million)
10.2 89,715
1
Short-term: A2
Coface analysis
Medium-term: Low risk
STRENGTHS ● The country has enjoyed the highest level of FDI per capita in Central Europe. ● The productive apparatus has great potential and labour productivity has improved substantially. ● The country’s foreign debt has not been a major constraint. ● Admission to the EU has bolstered its economic stability.
RISK ASSESSMENT FDI has allowed the country to sharply improve its competitiveness. Fuelled by exports, economic growth should continue in 2006, particularly with accommodating fiscal policy likely to spur consumption in the run-up to legislative elections. Although those buoyant economic conditions have not prevented occasional payment failures in the weakest sectors, the Coface company payment incident index has remained near the world average. In that context of steady sales abroad, and despite the exchange rate appreciation, external accounts have been improving. Although profit repatriation by foreign companies has continued to
WEAKNESSES Economic activity has depended on European demand. ● The cost of banking sector restructuring has exacerbated the public sector deficit. ● Profit repatriation by foreign companies has undermined the current account. ● The elections scheduled in 2006 could affect the pace of reforms. ●
strain the current account balance, FDI has amply covered the country’s financing needs. Foreign debt has remained under control. The persistence of large fiscal deficits has been a source of weakness even if public sector debt has remained at reasonable levels and the country continues to enjoy easy access to capital markets. In the political arena, the governing social democratic coalition has somewhat regained popularity with the conservative, euro-sceptical right still leading in the polls. The coalition has nonetheless postponed painful reforms until after the June-2006 legislative elections.
31
EUROPE AND THE CIS MAIN ECONOMIC INDICATORS US$ billions Economic growth (%) Inflation (%) Public sector balance (%GDP) Unemployment rate (%) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2001
2002
2003
2004
2005(e) 2006(f )
2.6 4.7 -5.0 8.9 33.4 36.5 -3.1 -3.3 -5.4 36.7 9.8
1.5 1.8 -6.6 9.8 38.5 40.7 -2.2 -4.3 -5.8 36.6 9.1
3.2 0.1 -6.0 10.3 48.7 51.2 -2.5 -5.7 -6.3 38.5 6.9
4.4 2.8 -4.0 9.5 66.9 67.8 -0.9 -5.6 -5.2 42.3 6.9
4.4 2.0 -6.3 7.2 78.4 76.6 1.8 -3.5 -2.8 37.6 6.6
4.6 2.2 -4.2 6.3 85.5 84.5 1.0 -5.3 -3.5 34.2 4.0
3.7
5.4
4.9
4.0
3.7
3.5
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET ■ Means of entry The Czech Republic joined the customs union when it became a member of the EU on 1 May 2004. As a result, there are no tariff or non-tariff barriers for products imported from the EU. The Czech Republic has made a tremendous effort to meet EU integration criteria and attract foreign investment. Its legislation on the legal and judicial framework for companies complies with Community standards in such matters as public procurement, competition, labour and taxation. Attitude towards foreign investors The government pursues a proactive foreign investment policy, mainly via the investment promotion agency, Czechinvest. To qualify for grants, companies must invest a minimum of CZK200 million (€6.6 million) over three years, or CZK100 million (€3.3 million) if their activity is based in a ‘high-unemployment’ region. At least 40 per cent of the investment must involve the purchase of industrial equipment and half of the production line must be made up of machines categorized as ‘leading-edge technology’. The project must comply with Czech environmental standards. Key provisions of the investment incentive scheme include:
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32
●
ten-year total exemption from corporation tax for newly formed entities and ten-year partial exemption for existing entities; ● discounts on building land and infrastructure through municipalities; ● job-creation, training and rehabilitation grants based on the unemployment rate. Companies investing in the so-called ‘strategic’ services sector (software development, high-tech equipment repair, telephone services, audit and consulting) are eligible for government subsidies, provided they invest a minimum of CZK30 million (€1 million) over three years, create 50 new jobs during this period and meet Czech environmental standards. Firms investing in the so-called 'technology' zones – ie research and development centres engaged in the design and development of innovative goods for the high-tech sector – are also eligible for government subsidies, provided they invest a minimum of CZK15 million (€500,000) and create at least 15 jobs over three years. Foreign exchange regulations The Czech crown is fully convertible. While it is difficult to forecast short-term variations, analysts expect an upward trend in the Czech currency over the long term. In 2000, it took CZK35.61 to buy one euro; in October 2005 it took just CZK29.7.
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CZECH REPUBLIC The intervention rate of the central bank has been 2 per cent since 31 October 2005, compared with 1.75 per cent in the period between 29 April and 31 October 2005. Business transactions are usually settled by bank transfer in euros or Czech crowns. The bulk of
payments between companies doing business together on a regular basis are made by SWIFT and pass off smoothly. However, for initial business transactions or large orders, it is advisable to use documentary credit.
1
PAYMENT AND COLLECTION PRACTICES
Debt collection It is advisable, as far as possible, not to initiate recovery proceedings locally because of the country’s cumbersome legal system, the high cost of legal action and lengthy court procedures – it takes almost three years to obtain a writ of execution due to a lack of judges properly trained in the rules of the market economy and proper equipment. Service of final demand for payment supported by proof of debt reminds the debtor of his or her payment obligations, increased by past-due interest payable from the day after the payment date stipulated in the commercial contract. Since 28 April 2005, the applicable rate, unless agreed otherwise by the parties, is the ‘repo’ rate applied by the Czech National Bank, in force on the first day of the reference half-year;
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increased by seven percentage points. Should the debtor lack the funds needed for immediate payment, it is advisable to seek an out-of-court settlement based on a schedule of payment, drawn up by a public notary, accompanied by an enforcement clause that allows them, in case of default by the debtor, to go directly to the enforcement stage, after the court admits the binding nature of that document. Where creditors have significant proof of claim (unpaid bills of exchange or cheques, acknowledgement of debt etc), they may obtain an injunction to pay (platebni rozkaz) under a fast-track procedure. These may take from three months to a year depending on the workload of the courts but do not necessitate a hearing as long as the claim is sufficiently well founded. Where a debtor contests an injunction within 15 days of its service, an ordinary procedure will then apply with the parties subsequently summoned to one or more hearings to be heard and produce evidence. The judge will then decide whether to throw out the plaintiff’s application or order the debtor to pay principal and costs. Ordinary proceedings are partly in writing with the parties filing submissions accompanied by all supporting case documents (original or certified copies) and partly oral with the litigants and their witnesses heard on the main hearing date. Any settlement reached between the parties during these proceedings and ratified by the court is tantamount PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 350 300
WORLD Czech Republic
250 200 150 100 50 0
D ec -9 Ju 4 ne 95 D ec -9 Ju 5 ne 96 D ec -9 Ju 6 ne 97 D ec -9 Ju 7 ne 98 D ec -9 Ju 8 ne 99 D ec -9 Ju 9 ne 00 D ec -0 Ju 0 ne 01 D ec -0 Ju 1 ne 02 D ec -0 Ju 2 ne 03 D ec -0 Ju 3 ne 04 D ec -0 Ju 4 ne 05 D ec -0 5
Payment Bills of exchange and cheques are not widely used, as they must be issued in accordance with certain criteria to be valid. For unpaid and protested bills of exchange (smenka cizí), promissory notes (smenka vlastní) and cheques, creditors may access a fast-track procedure for ordering payment under which, if the judge admits the plaintiff’s application, the debtor has only three days to contest the order against him or her. Bank transfers are by far the most widely used means of payment. Leading Czech banks – after successive phases of privatization and concentration – are now linked to the SWIFT system, which provides an easier, quicker and cheaper method for handling domestic and international payments. Inspired by EU regulations, a new payment systems law in force since 1 January 2003 sets the rules for transferring funds in the enlarged European area and empowers the Czech National Bank (Ceská Národni Banka) to ovesee local use of electronic payment instruments.
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33
EUROPE AND THE CIS to a writ of execution, in case of subsequent noncompliance with the agreement obtained. Commercial company law, commercial disputes and insolvency law fall under the competence of regional courts (krajsky soud) or the Prague regional court known as the municipal court (mestsky soud). To speed up enforcement of court orders (with over
400,000 cases pending enforcement by end-June 2002), a new body of bailiffs (soudní exekutor), endowed with less formal enforcement powers, was created in May 2001 and has been gradually improving enforcement. For that bailiff category, a different fee schedule applies based on the amount concerned by the execution.
OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 31 ■ Public consumption 15 ■ Investment 17
Exports: 63% of GDP
Imports: 65% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
20000
20000
15000
15000
10000
10000
5000
5000
0
0 Germany Slovakia
Austria
UK
Poland
Germany
Italy
China
Slovakia
France
IMPORTS by products ■ All food items 5% ■ Fuels 8% ■ Chemical products 11% ■ Other manufactured goods 29% ■ Capital goods and transport equipment 43% ■ Miscellaneous 5%
EXPORTS by products ■ Chemical products 6% ■ Other manufactured goods 34% ■ Capital goods and transport equipment 50% ■ Miscellaneous 10%
STANDARD OF LIVING / PURCHASING POWER Indicators
34
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1,000 inhabitants Number of computers per 1,000 inhabitants
Czech Republic Regional average DC average 15,600 7,150 0.874 22.4 75 15.5 360 177.4
7,530 2,580 0.806 30 64 20 228 73.4
4,300 1,280 0.697 33 43 31 112 28.4
DENMARK
Denmark Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
Coface analysis
5.4 243,800 45,140
1
Short-term: A1
RISK ASSESSMENT Strong economic growth marked 2005. Income tax reductions, low interest rates, and an improved labour market spurred household consumption. Residential property investment continued to grow strongly thanks to the introduction of variable-rate, deferred-repayment mortgage loans. Similarly, productive investment has been robust, underpinned by attractive financing terms. Exports grew strongly, buoyed by the chemicals and mechanical engineering sectors, and especially services, after a change in the statistical recording procedure. Growth will remain strong in 2006 despite a slight slowdown. Although the impact of the tax incentives will wane, the labour market’s continued improvement will pick up some of the slack in stimulating household spending. High production capacity utilization rates will buoy investment.
Export performance will depend heavily on economic conditions in the EU, which absorbs 50 per cent of Danish exports. Germany is its number one trading partner. The government will run a surplus again thanks particularly to revenues linked to exploitation of North Sea hydrocarbon fields. Bankruptcies declined again in 2005 (down 5 per cent) despite slight deterioration in the second half with the Coface payment incident index remaining below the world average. The services sector’s financial situation has been satisfactory as has been that of the industrial sector thanks to development of wind turbine-electricity production and waste environmental management. Construction has benefited from a surge of new housing starts. However, the food and transport sectors have appeared weaker. Payment behaviour should remain satisfactory in 2006.
MAIN ECONOMIC INDICATORS % Economic growth Consumption (var.) Investment (var.) Inflation Unemployment rate Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)
2001
2002
2003
2004
0.7 0.1 -0.3 2.3 4.3 4.6 1.2 53.8 3.1 1.9 3.0
0.5 0.8 1.2 2.4 4.6 3.5 0.3 54.1 4.8 6.5 2.0
0.5 1.4 0.4 2.1 5.6 2.4 0.0 55.5 -1.1 -0.6 3.3
2.1 3.8 -0.5 1.2 5.4 2.2 1.7 52.8 3.2 6.5 2.5
2005(e) 2006(f ) 3.0 4.4 4.8 1.8 4.9 2.1 3.7 47.0 9.3 10.2 3.0
2.7 3.0 4.9 1.7 4.6 2.2 3.0 43.0 5.7 6.4 2.2
35 e = estimate, f = forecast
EUROPE AND THE CIS PAYMENT AND COLLECTION PRACTICES
Debt collection Out-of-court collection begins with the creditor or his or her legal counsel sending the debtor a final demand for payment by registered or ordinary mail, in which the debtor is given ten days to settle the principal amount, plus any interest penalties provided for in the agreement. Where there is no such clause, the rate of interest applicable to commercial agreements contracted after 1 August 2002 is the Danish National Bank’s benchmark (lending rate or udlånsrente) in force on 1 January or 1 July of the year in reference, plus seven percentage points. It should also be noted that, where the due date for payment is not complied with, any settlement or acknowledgement of debt negotiated at this stage of the recovery process is directly enforceable, on condition that an enforcement clause is duly included in the new settlement or agreement. For claims that are not settled out of court, creditors usually engage a lawyer to defend their interests, even though Danish law allows plaintiffs and defendants direct representation in court.
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36
Unlike other countries, Denmark has only one type of legal professional: lawyers (ie there are no notaries, barristers, bailiffs-at-law etc). Where debtors fail to respond to a demand for payment or where the dispute is not serious, creditors may obtain, usually after three months of proceedings, a judgment following an adversarial hearing or a judgment by default ordering the debtor to pay, within 14 days, the principal amount plus interest and expenses – including court fees and, where applicable, a contribution to the creditor’s legal costs. Complex or disputed claims of up to 1 million Danish krone are heard by the court of first instance (Byret). The proceedings at this level are predominantly oral, rather than written. Claims above this amount are heard by one of two regional courts: the Vestre Landsret in Viborg or the Østre Landsret in Copenhagen. The proceedings here involve a series of preliminary hearings, in which the parties present written submissions and proofs, and a plenary hearing, in which the court hears witness testimonies and the parties’ arguments. Denmark does not have a system of commercial courts outside the Copenhagen area, which has a maritime and commercial court (Sø-og Handelsretten) presided over by a panel of professional and non-professional judges competent to hear insolvency actions as well as commercial and maritime disputes. PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
250
WORLD Denmark
200
150
100
50
0
Ju ne 9 D 3 ec Ju 93 ne 9 D 4 ec Ju 94 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 9 D 7 ec Ju 97 ne 98 D ec Ju 98 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 01 D ec Ju 01 ne 0 D 2 ec Ju 02 ne 0 D 3 ec Ju 03 ne 04 D ec Ju 04 ne 0 D 5 ec -0 5
Payment Like the cheque, the bill of exchange is not frequently used in Denmark. Both are an embodiment and, therefore, an acknowledgement of debt. Accepted but remaining unpaid bills and cheques are legally enforceable instruments that exempt creditors from obtaining a court judgment. In such cases, a judge–bailiff (Fogedret) is appointed to oversee enforcing attachment. First, however, the debtor is summonsed to declare his or her financial situation for the purposes of determining his or her ability to repay the debt. It is a criminal offence to make a false statement of insolvency. Bank transfers are the most commonly used means of payment. All major Danish banks use the SWIFT network – a rapid and efficient international funds transfer service. ■
ESTONIA
Estonia Population (million inhabitants) GDP (US$ million)
1.4 9,082
1
Short-term: A2
Coface analysis
Medium-term: Low risk
STRENGTHS ● Implementation of strict macroeconomic policies and far-reaching reforms has allowed the country to move closer to EU standards rapidly. ● With one of Central Europe’s most propitious business environments, Estonia’s economic performance has also been among the region’s best. ● That climate has fostered rapid modernization of industry and the redirecting of foreign trade to Scandinavian markets. ● The public sector debt level has been very low.
WEAKNESSES Growth has depended on international economic conditions due to the high degree of openness to trade. ● A low savings rate and equipment needs, as well as the high-import content of subcontractingindustry exports have generated a large current account deficit. ● Foreign debt has been high with limited foreign exchange reserves. ● The high inflation rate could jeopardize rapid admission to the euro zone. ●
RISK ASSESSMENT Growth has remained robust, buoyed by domestic demand, exports and tourism. With the public sector still running surpluses, the oil price upsurge and administered prices have driven inflation higher. Although still large, external deficits have begun to shrink. In 2006, an import decline caused by less dynamic consumption should offset the export slowdown expected in the telecommunications sector. Similarly, increased transfers from the EU should partly cover the increase in earnings payouts to foreign investors. Despite an appreciable inflow
of FDI, foreign debt rose substantially in line with the expansion of domestic credit. Steady sales abroad have nonetheless kept the debt service ratio at sustainable levels. The current government, the twelfth since independence, holds a narrow majority in parliament. Despite internal rivalries, it should continue the effort to harmonize the economy with the rest of the EU. However, compliance with Maastricht inflation criterion will be difficult, which could delay the country’s admission to the euro zone, normally scheduled for 2007.
CONDITIONS OF ACCESS TO THE MARKET ■ Market overview Per capita GDP in 2005 was €7,600 – the highest among the Baltic states. The average wage in mid2005 was €566, up 9.4 per cent on 2004.
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Means of entry Estonia has founded its market economy on ultraliberal trade principles. The country joined the EU on 1 May 2004. Until 2000, there were no import duties. Since 1 July 2002, Estonia applies the EU common external tariff to non-EU goods. Trade
37
EUROPE AND THE CIS MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Unemployment rate (%) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
6.5 5.8 0.4 12.6 3,360 4,148 -789 -339 -5.7 55.5 7.5
7.2 3.6 1.4 10.3 3,532 4,621 -1,089 -717 -10.2 60.1 9.1
6.7 1.3 2.9 10.0 4,608 6,162 -1,554 -1,116 -12.1 68.7 10.5
7.8 3.0 1.7 9.7 5,970 7,936 -1,966 -1,432 -12.7 81.2 11.7
1.7
1.9
2.0
2.0
2005(e) 2006(f ) 7.7 4.2 0.4 9.0 7,641 9,277 -1,636 -1,367 -10.7 84.6 11.1
6.7 3.6 0.0 8.5 8,815 10,425 -1,610 -1,337 -9.3 87.8 11.2
1.8
1.6
e = estimate, f = forecast
with EU countries is exempt from customs duties. Excise duties are levied on certain products without any distinction between domestic and imported goods. Estonia administers a system of non-tariff barriers based on automatic licensing for some products (wines and spirits, lubricants, medicines). The same licensing rules apply to domestically produced goods. There are no ceilings. As expected upon EU accession, Estonia has clearly softened its stand vis-a-vis beef and pig imports from France. Wine registration formalities, however, remain longwinded and complicated. The country’s standards legislation does not contain any restrictions of note that might serve to protect local industry. Although down-payments are advisable for initial business transactions, 30 or 60-day credit is the most widely used method of payment. Credit cover is recommended. The Estonian banking industry is perfectly sound. The two leading banks are Swedish-owned and account for 80 per cent of the country’s banking assets. Attitude towards foreign investors Estonia’s foreign investment law, in force since September 1991, applies simple and nondiscriminatory company registration procedures. A foreign company may hold a 100 per cent stake in a local company. There is no special incentive scheme and foreigners are accorded the same treatment as
nationals in matters of direct taxation. There are no restrictions on the repatriation of profits after tax, dividends or proceeds from the sale or liquidation of an investment. Estonia has a reciprocal investment promotion and protection agreement as well as a dual taxation agreement with France, both of which are in force. Income tax and corporation tax in 2006 will be levied at a flat rate of 23 per cent. Plans are under way to gradually cut this to 20 per cent. Since 1 January 2000, all profits reinvested by firms are tax-exempt. Estonian manpower is an asset for foreign investors. It is highly skilled and cheap. Social security contributions, borne entirely by employers, amount to 33 per cent of wages, including 13 per cent for health insurance and 20 per cent for pensions. Unemployment contributions – 0.5 per cent of an employee’s wage borne by the employer and 1 per cent by the employee – were introduced on 1 January 2002. A pension fund, the second pillar of the country’s pension system, was launched on 1 April 2002.
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38
Foreign exchange regulations With a parity of 8 kroon to the deutschmark that has remained unchanged since its launch in June 1992, the Estonian kroon is freely convertible and consequently enjoys de facto parity with the euro (€1:15.64664 kroon). Exchange controls have been
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ESTONIA abolished and local banks accept accounts in both local and foreign currency. Estonia joined ERM2 in June 2004, the last stage before the adoption of the
euro on 1 January 2007. Rising inflation, however, could delay entry into the euro zone.
1
OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 32 ■ Public consumption 10 ■ Investment 17
Exports: 75% of GDP
Imports: 83% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
1500
1500
1200
1200
900
900
600
600
300
300
0
0 Finland
Sweden
Russia Germany Latvia
Finland Germany Russia
Sweden Ukraine
IMPORTS by products ■ All food items 11% ■ Fuels 6% ■ Chemical products 9% ■ Other manufactured goods 27% ■ Capital goods and transport equipment 41% ■ Miscellaneous 5%
EXPORTS by products ■ All food items 11% ■ Agricultural raw materials 9% ■ Chemical products 6% ■ Other manufactured goods 38% ■ Capital goods and transport equipment 30% ■ Miscellaneous 7%
STANDARD OF LIVING / PURCHASING POWER Indicators
Estonia
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1,000 inhabitants Number of computers per 1,000 inhabitants
12,680 5,380 0.583 28.5 70 16.1 341 440.4
Regional average DC average 7,530 2,580 0.806 30 64 20 228 73.4
4,300 1,280 0.697 33 43 31 112 28.4
39
EUROPE AND THE CIS
Finland Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
Coface analysis
5.2 185,900 35,559
Short-term: A1
RISK ASSESSMENT The growth collapse in 2005 is attributable to the papermaking production stoppage caused by a social conflict in May and June and to its repercussions on forestry, chemicals, transport and, more generally, exports, which have been affected by a mechanical slowdown despite Nokia’s renewed sales dynamism. Productive investment by companies, meanwhile, declined sharply. Only construction and consumption have continued to drive economic activity, with households benefiting from an income tax reduction – granted to compensate for the effects of a multiyear national wage-moderation agreement signed end-2004 – and an improved employment picture. Although growth should accelerate in 2006, much of the rebound will be the result of a catch-up
phenomenon. Household consumption will drop slightly with purchasing power gaining little as higher local taxes and social contributions, an upsurge of inflation and a slower rate of job creation offset the continued income-tax decline. Conversely, exports will gain momentum due not only to basic effects stemming from settlement of the 2005 papermaking conflict, but also to delivery of passenger ships and dynamic telecommunications equipment sales notably to Baltic and Asian countries. That dynamism will prompt companies to resume the purchase of equipment while the building and public works segments will remain dynamic. The financial situation of Finnish companies has been generally solid, allowing them to survive the slowdown in spring 2005 without incident as
MAIN ECONOMIC INDICATORS % Economic growth Consumer (var.) Investment (var.) Inflation Unemployment rate Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)
2001
2002
2003
2004
1.0 2.0 9.7 2.7 9.1 4.3 5.2 51.8 -0.8 1.0 7.2
2.3 1.7 -7.1 2.0 9.1 3.3 4.2 50.8 5.2 2.1 7.6
2.4 4.5 -7.6 1.3 9.1 2.3 2.6 49.9 1.2 2.4 3.8
3.5 3.0 4.6 0.1 8.9 2.2 1.9 49.2 5.6 6.0 5.3
2005(e) 2006(f ) 1.9 3.2 0.3 1.0 8.2 2.0 1.7 48.6 4.2 5.6 3.4
3.3 2.9 4.9 1.7 7.8 2.3 1.5 47.0 5.9 4.9 3.1
40 e = estimate, f = forecast
FINLAND evidenced by a further decline in bankruptcies (down 5 per cent in 2005) and a good Coface payment incident index. Considering Finland’s bright macroeconomic outlook, the situation
should remain favourable in 2006. However, importers dealing with Russia and the Baltic countries will again bear close watching.
1
PAYMENT AND COLLECTION PRACTICES Payment Bills of exchange are not commonly used in Finland because, as in Germany, they signal the supplier’s distrust of the buyer. A bill of exchange primarily substantiates a claim and constitutes a valid acknowledgment of debt. Cheques, also little used in domestic and international transactions, only constitute acknowledgement of debt. However, cheques that are uncovered at the time of issue can result in the issuers being liable for criminal penalties. Moreover, as cheque collection takes particularly long in Finland (20 days for domestic cheques or those drawn in European and Mediterranean coastal countries, 70 days for cheques issued outside Europe), that payment method is not recommended. Conversely, SWIFT bank transfers are increasingly used to settle commercial transactions. Finns are familiar with this efficient method of payment. When using this instrument, sellers are advised to provide full and accurate bank details to facilitate timely payment; it should not be forgotten that the transfer payment order will ultimately depend on the buyer’s good faith.
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Debt collection Out-of-court collection begins with the debtor being sent a final demand for payment by registered or ordinary mail in which he or she is asked to pay the outstanding principal together with any contractually agreed interest. In the absence of an interest rate clause in the agreement, interest automatically accrues from the due date of the unpaid invoice at a rate equal to the Central Bank of Finland’s (Suomen Pankki) sixmonthly rate, calculated by reference to the European Central Bank’s refinancing rate plus seven percentage points (Interest Act Amendment, effective since 1 July 2002). The Interest Act
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(Korkolaki) of 20 August 1982 already required debtors to pay up within contractually agreed timeframes or become liable to interest penalties. Note, moreover, that according to contract law the ordinary term of limitation, previously ten years, has been reduced to three years (since 1 January 2004) and that it applies retroactively to contracts already in force. For certain documented and undisputed claims, creditors may resort to the fast-track procedure resulting in an injunction to pay (suppea haastehakemus). This is a simple written procedure based on submission of whatever documents substantiate the claim (invoice, bill of exchange, acknowledgement of debt etc). The presence of a lawyer, although commonplace, is not required for this type of action. The reform of civil procedure, enacted on 1 December 1993, requires plaintiffs to submit all supporting documents and evidence substantiating a claim before the debtor is asked to provide, in response, a written statement explaining his or her position. During the preliminary hearing, the court bases its deliberations on the parties’ written submissions and supporting case documents. The court then convokes the litigants to hear their arguments and decide on the relevance of the evidence. It is possible for the dispute to be resolved during this preparatory phase of the proceedings. Where the dispute remains unresolved after this preliminary hearing, plenary proceedings are held before the court of first instance (Käräjäoikeus) comprising one to three presiding judges depending on the case’s complexity. During this hearing the judges examine probative, documentary evidence, hear the parties’ witnesses and the litigants state their final claims before the judge delivers his ruling very rapidly. The average timeframe for obtaining a writ of execution is about 12 months.
41
EUROPE AND THE CIS
42
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
250
WORLD Finland
200
150
100
50
0
Ju ne 9 D 3 ec Ju 93 ne 9 D 4 ec Ju 94 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 97 D ec Ju 97 ne 9 D 8 ec Ju 98 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 0 D 1 ec Ju 01 ne 02 D ec Ju 02 ne 0 D 3 ec -0 Ju 3 ne 04 D ec Ju 04 ne 0 D 5 ec -0 5
Commercial cases are generally heard by civil courts, although a ‘Market and Competition Court’ (Markkinatuomioistuin) located in Helsinki has been in operation as a single entity since 1 March 2002. This court is competent to examine fraudulent business practices, denounce unfair trading, investigate corporate mergers, deliver prohibition orders against such practices and slap fines on offenders.
FRANCE
France Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
Coface analysis
62.4 2,046,700 33,998
1
Short-term: A1
STRENGTHS ● A high birth rate has offset the aging of the population and buoyed domestic demand. ● Diversification of energy supply sources has ensured the country’s relative independence. ● The financial system is sound and has opened slightly to foreign actors. ● The existence of international groups has bolstered the competitiveness of sales abroad in the transport, energy, cosmetics, engineering and water treatment areas, for example. ● A skilled workforce and high productivity per hour have partly offset the short work year.
RISK ASSESSMENT Despite a burst of economic activity in the summer, 2005 was clearly a slowdown year. Although household consumption and company investment held up well, thanks notably to a decline in the savings rate and an increase in debt, foreign trade had a negative impact on growth. Exports suffered from the past euro appreciation and the essentially sluggish conditions experienced by the country’s main European trading partners while imports continued to grow strongly, spurred by robust domestic demand. Still underpinned by domestic demand, economic growth should accelerate in 2006 fuelled by an export recovery. Despite limited income,
WEAKNESSES Public sector debt and deficits will be difficult to sustain with the prospect of increased health and pension spending. ● The limited competition in some sectors (retail, network industries, and services) has been detrimental to efficient resource allocation. ● Exports have not focused enough on high growth regions, which has undermined external accounts. ● Labour legislation, territorial organization and the education system have not been very conducive to reducing structural unemployment, particularly for the youth and less skilled. ● Research has suffered from a lack of cooperation between the public and private sectors. ●
growth and rising costs linked to health, housing and energy, an improved employment picture (particularly government-aided jobs), the continued decline of mass distribution prices (Galland law reform) and tax breaks granted in the run-up to general elections in spring 2007 will continue to buoy household consumption. Exports should benefit from the euro depreciation as well as the German and, to a lesser extent, Italian recoveries. The still very favourable monetary conditions and improved profitability should prompt companies to increase their investments moderately. In a context of economic slowdown, company bankruptcies rose 6 per cent in 2005 with the deterioration concentrated on smaller companies in
43
EUROPE AND THE CIS MAIN ECONOMIC INDICATORS %
2001
2002
2003
2004
Economic growth Consumption (var.) Investment (var.) Inflation Unemployment rate Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)
2.1 2.4 3.1 1.8 8.7 4.3 -1.5 64.9 2.6 2.5 1.7
1.3 2.4 -3.0 1.9 9.0 3.3 -3.3 68.7 1.7 1.5 1.0
0.9 1.7 0.8 2.2 9.7 2.3 -4.1 71.2 -1.7 1.3 0.4
2.2 2.2 1.4 2.3 9.8 2.2 -3.7 74.0 2.1 6.1 -0.4
2005(e) 2006(f ) 1.6 2.0 3.1 1.9 9.8 2.0 -3.2 76.0 2.2 5.3 -0.8
2.0 2.1 3.2 2.0 9.5 2.3 -3.3 77.0 4.8 5.2 -0.9
e = estimate, f = forecast
various sectors: services to private individuals (hotels and food service), retail and construction. Large, especially industrial, companies with solid financial situations have withstood the increases in raw material costs rather well. The Coface payment incident index thus stabilized.
A slight decline in payment incidents should accompany a more buoyant environment in 2006. However, road transport, wine trading and cooperatives, furniture, textiles, shoes and the carindustry plastics technology segment will continue to suffer from above-average vulnerability.
MAIN ECONOMIC SECTORS Steel French consumption and production declined in 2005. Consumption declined an estimated 8 per cent for long products and 10 per cent for flat steel. That demand decline led to production cutbacks intended to reduce stocks and avoid price declines. Despite the handicap of a strong euro early in the year, exporters benefited from the upward world demand trend, notably in China and Central and Eastern Europe. The increase in steel consumption, reflecting business activity in user sectors (mechanical engineering, civil engineering, car industry, home appliances), should not exceed 1 per cent in 2006.
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Building and public works In 2005 business activity rose 3.3 per cent in the building industry thanks to record levels of new home starts (up 8.6 per cent), spurred notably by the so-called Robien mechanism. The increase in building permits and the new public housing
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44
programme should ensure sustained activity in 2006 and succeeding years. However, the public works market has been posting more moderate growth estimated at 1.3 per cent for 2005 with orders from the government up 5.5 per cent, local authorities up 1.5 per cent, private individuals up 1.2 per cent but down 5.6 per cent from motorway companies. The entire sector should be up 2–3 per cent for 2006. Textiles and clothing In 2005, production declined in the textile and clothing sectors by 7.7 and 9.7 per cent respectively. Those declines are linked to the increasing volumes of low value-added products imported from Asia. The trend toward purchasing cost reduction by retailers has caused competition to intensify. Although demand is still strong, it has particularly benefited Chinese imports to the detriment of French industry and traditional suppliers like Morocco and Tunisia. Meanwhile, the
■
FRANCE increasing cost of raw materials like oil has penalised synthetic fibre production. Those difficulties have affected the solvency of companies in that segment, whose financial health has been much poorer than the national average. In 2006, production should decline again to the benefit of imports from Asia. Paper In 2005 production stabilized, even if some segments like paper for use in the home or coated freesheet, posted strong growth. Company profitability was squeezed between increasing energy, transport and raw material costs and difficulties in passing on those increases in sales prices amid sluggish demand. The pressure should ease somewhat in 2006 with those costs stabilizing or even declining and the French and European demand trend improving.
activity is nonetheless expected for early 2006. General mechanical engineering will continue to post sales growth both domestically and abroad. Precision mechanical engineering will continue to grow thanks to strong demand from the building sector while increased orders from the aviation industry and stable orders from the car industry will continue to buoy machine tools.
1
■
Mechanical engineering In 2005 equipment manufacturing had to contend with a 1.6 per cent decline in demand linked to a lack of industrial investment, the euro appreciation and higher steel prices. An upsurge of business
■
Car industry Vehicle registrations rose about 3 per cent in 2005 with that increase benefiting foreign brands (up 8.6 per cent) more than French carmakers (up 1.5 per cent). The latter have had to resort to production stoppages since November 2005 in order to adjust to the much less buoyant demand levels. That trend has increased the pressure on parts manufacturers, especially second-tier companies specialized in plastics technology and smelting, already suffering from higher raw material prices and the pressure exerted by their order-givers on prices. In 2006, considering the moderate growth expected in the European market, carmakers and their parts manufacturers will depend even more on emerging markets as their source of growth.
■
PAYMENT AND COLLECTION PRACTICES Payment Among methods of payment, the bank card is now the instrument used most in France, dethroning cheques although these are, nonetheless, still widely used. In 2004, bank cards represented 33.8 per cent of the transaction volume cleared through the banking system against 29 per cent for cheques.* For cheques remaining unpaid over 30 days from the date they were first presented for payment, the beneficiary may immediately obtain an enforcement order (without need of further procedural act or cost) based on a certificate of non-payment provided by his or her banker after a second unsuccessful presentation of the cheque for payment and where the debtor has not provided proof of payment within 15 days of formal notice to pay served by a bailiff (article L 131–73 of the monetary and financial code). ■
*
Source: Bank of France, 2004 financial report.
Bills of exchange, a much less frequently used mode of payment than cheques, have been in virtually constant decline in terms of number of operations, with volume remaining essentially steady in value terms. Bills of exchange are attractive for companies insofar as they may be discounted or transferred, thus providing a valuable source of short-term financing. Moreover, they allow creditors to bring legal recourse in respect of exchange law (droit cambiaire) and are particularly suitable for instalment payments. The use of transfers, still lagging behind cheques, was stable in 2004, representing about 15 per cent of transaction volume as in 2003. However, cheques and transfers have represented the major portion of script payment volume in value terms with 39 per cent and 35 per cent, respectively, of the total amount.*
45
EUROPE AND THE CIS Bank transfers can be made within France or internationally via the SWIFT network, which offers a reliable platform for timely payment subject to mutual trust and confidence between suppliers and their customers.
collection, even in routine cases lacking in any real urgency, provided the claims are not subject to substantive dispute. In such cases, the judge can grant a provisional payment in favour of the applicant that can represent up to 100 per cent of the claim. However, the summary procedure requires the presence of an attorney to represent the creditor in court. If a claim proves to be litigious, the judge competent to rule on special urgency (juge des référés) evaluates whether the claim is well founded. As appropriate, the judge may then declare him- or herself incompetent, based on his or her assessment of the apparent validity of the case, and invite the plaintiff to seek a ruling on the substance of the case through the formal court process. Formal procedures of this kind permit having the validity of a claim recognized by the court, a relatively lengthy process lasting about a year or more owing to the emphasis placed on the adversarial nature of proceedings and the numerous phases involved in the French procedural system: submission of supporting case documents, written submissions by the litigants, examination of the types of evidence, various recesses for deliberations and so on. If justified by a claim’s size and the uncertain solvency of the debtor, legal action may include a petition to obtain an attachment order on available assets and thereby protect the plaintiff ’s interests pending completion of the proceedings and enforcement of the court’s final verdict.
Debt collection Since the new economic regulations law of 15 May 2001, commercial debts automatically bear interest from the day after the payment due date shown on the invoice or specified in the commercial contract. Unless the terms and conditions of sale stipulate interest rates and conditions of application, the applicable rate will be the interest rate applied by the European Central Bank in its most recent refinancing operations, increased by seven percentage points. Formal notice to pay nonetheless remains a precondition for creditors to take any legal action. Where a debt claim results from a contractual undertaking and is both liquid and undisputable, creditors may use the injunction-to-pay procedure (injonction de payer), a flexible system based on the use of pre-printed forms not requiring applicants to argue their case before the magistrates’ court (tribunal d’instance) or competent commercial court (the court having jurisdiction in the district where the debtor’s registered offices are located). Via that procedure, creditors can rapidly obtain a court order to be served subsequently by a bailiff. A summary procedure (référé-provision) provides creditors with a rapid means of debt
■
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD France
250
200
150
100
50
5
05
-0 D ec
4 -0
ne
ec D
Ju
3
04 ne Ju
D
ec
-0
03
2 -0 ec
ne
D
Ju
1
02 ne Ju
D
ec
-0
01
0
00
-0
ne Ju
D ec
9 -9
ne Ju
D ec
8
99
-9
ne Ju
98
-9
ne Ju
D ec
46
D ec
7
0
GEORGIA
Georgia Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
5.1 3,988 782
1
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT Economic growth has been robust since 2003 due notably to a catch-up phenomenon after the economic collapse of the 1990s. Moreover, construction of the Baku–Tbilisi–Ceyhan (BTC) oil pipeline and a gas pipeline linking Azerbaijan to Turkey via Georgia gave a substantial boost to economic activity in 2005 and transport commissions should start bringing in foreign currency earnings this year. High metal prices (mainly for copper), accommodating monetary policy and some progress on structural reforms have also been buoying growth, while fiscal revenues have recovered. The country’s economy is nonetheless still weak, remaining dependent on metal prices.
Georgia still has very out-of-date productive apparatus and a large informal economy, notably smuggling. Large external account imbalances have made the country dependent on international aid. Meanwhile, the political situation has remained precarious. Although Georgia has regained control over Adjara, the Abkhazia and South Ossetia republics are still autonomous in practice. Tensions with Russia have persisted even if the troops stationed in the country have begun to withdraw. Finally, the resignation of the Foreign Minister, Salomé Zourachvili, under pressure from parliament revealed the emergence of important domestic tensions.
MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ millions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
4.7 4.7 -2.0 473 959 -486 -6.5 51.7 15.4
5.5 5.6 -2.0 553 992 -439 -6.0 52.4 13.9
11.1 4.8 -2.5 730 1,328 -598 -7.2 46.4 8.0
6.2 5.7 0.7 1,264 2,016 -752 -7.6 35.8 8.0
8.5 9.4 -3.5 1,386 2,620 -1,234 -11.8 29.4 8.0
7.0 6.0 -3.3 1,510 2,548 -1,038 -7.1 26.3 6.1
1.4
2.0
1.0
2.0
2.0
2.0
e = estimate, f = forecast
47
EUROPE AND THE CIS
Germany Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
Coface analysis
82.5 2,751,100 33,500
Short-term: A1
STRENGTHS ● Industrial export competitiveness, enhanced notably by wage moderation and innovation, has contributed to the formation of a current account surplus. ● By involving all actors, company ‘codetermination’ has facilitated restructuring, although sometimes slowing down the process. ● Efforts on Agenda 2010 reforms intended, among other things, to increase labour market flexibility and restore the social security system’s financial equilibrium, should continue. ● Germany has benefited from the admission to the EU of its Central and Eastern European trading partners.
48
RISK ASSESSMENT High unemployment, wage pressure and social service cutbacks have affected household consumption. Exports, the main economic engine, have continued to post good growth thanks to competitiveness gains registered in recent years and favourable sectoral and geographic specialization. Economic growth should strengthen slightly throughout 2006. Exports will make further gains thanks to the positive impact of the euro’s recent weakening along with improved economic
WEAKNESSES Public sector finances have been running very large structural deficits with the confusion between Bund, Länder and towns on decision making and financing hardly conducive to restoring equilibrium. ● The country’s eastern part has been struggling to catch up, notwithstanding the provision of copious aid whose effectiveness has fallen short of expectations. ● Mittelstand companies have been seeking a new model of financing, which the banking sector has only been doling out parsimoniously. ● Aging demographics have been affecting growth and will constitute a challenge for the social safety net. ● Facilities for small children and classic higher education have been showing weaknesses while the decline of public sector investment has affected research and infrastructure in general. ●
conditions in the euro zone. In a still-favourable monetary and fiscal environment, household consumption should increase slightly amid easing unemployment and the prospect of a VAT increase on 1 January 2007. In that context, companies will continue to increase their equipment purchases. Despite moderate economic growth on balance, company solvency has become satisfactory again with the Coface payment incident index returning to good levels. Bankruptcies have declined (down 5 per cent in 2005) with margins recovering thanks to
GERMANY MAIN ECONOMIC INDICATORS %
2001
2002
2003
2004
Economic growth Consumption (var.) Investment (var.) Inflation Unemployment rate Short-term interest rate Public sector balance (% GDP) Public sector debt (% GDP) Exports (var.) Imports (var.) Current account balance (% GDP)
1.4 1.8 -2.5 1.9 7.4 4.3 -2.8 60.5 6.8 1.4 0.1
0.1 -0.5 -6.6 1.3 8.2 3.3 -3.5 62.8 4.1 -1.6 2.1
-0.1 0.0 0.2 1.0 9.1 2.3 -3.8 65.3 2.3 5.0 2.3
1.1 0.2 0.0 1.6 10.1 2.2 -3.7 65.0 8.3 6.1 3.7
2005(e) 2006(f ) 0.8 -0.5 4.2 2.0 11.3 2.0 -3.8 67.0 6.1 4.4 4.5
1.4 0.7 5.0 1.7 10.8 2.2 -3.2 68.0 6.2 5.0 4.7
1
e = estimate, f = forecast
delocalizations, wage moderation and a rationalization of production tools. The increasing scarcity and cost of credit caused by banking sector restructuring has provided strong encouragement on that score. The upturn has benefited companies
focusing on exports with production facilities abroad more than it has companies focusing on the domestic market amid sluggish public and private consumption. The company financial situation should continue to improve in 2006.
MAIN ECONOMIC SECTORS Paper Buoyed by surging exports to Central and Eastern Europe, the paper industry sharply increased production in 2005 even while reducing overcapacity. However, the weakness of domestic demand has prevented companies from increasing prices enough to offset the unfavourable impact of higher raw material, energy and transport costs on profitability. Profitability will remain unsatisfactory in 2006 despite moderately higher volumes and stabilization of production costs. The printing industry seems to have bottomed out even with production costs remaining high and work increasingly done by labour-intensive Eastern European printers. The industry has benefited from a slight increase in spending on advertising, the source of two-thirds of business volume.
■
Chemicals Despite a slowdown during the year, German chemicals production grew strongly in 2005. However, producers have only been able to partially
■
pass on higher raw material, energy and transport costs to customers. Although the upstream industry has been relatively successful in preserving its margins, fine and specialty chemicals – where mass distribution has been an important market – has suffered more. In that context, companies have continued their restructuring programmes to adjust production capacity, refocus on a limited number of activities, establish themselves in dynamic emerging markets and thereby enhance their profitability. Mechanical engineering In 2005, business activity benefited from the continued influx of orders from abroad that began in 2004. Equipment intended for farming and forestry operations, energy production, mining, construction and machine tools. However, higher raw material costs, despite a mid-year decline, have affected profitability. Considering the slowdown of new orders, business should sag in 2006. Exports to emerging regions, notably China, will remain the most dynamic market outlet.
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49
EUROPE AND THE CIS Textiles The disappearance of quotas has affected Germany less than southern European countries, with most companies having already delocalized the production of high-volume items. Production nonetheless still declined 4 per cent in clothing and 1 per cent in textiles. That particularly affected manufacturers of pullovers, leather clothing and underclothes. The upsurge in the production of work clothes and unwoven articles was not enough to reverse the trend. The outlook for 2006 is uncertain. Restoration of quotas with China and the persistent sluggishness of consumption will affect textiles distribution. Independent specialized retailers will continue to disappear from downtown areas to the benefit of large foreign chains and a few local players like Gerry Weber that control the entire chain of production from creation to retail sales.
■
Mass distribution Stagnant consumption and the German consumer’s quest for the least expensive product have impeded turnover growth. Moreover, spending linked to housing, energy and health has increased at the expense of traditional buying. The sector has been suffering from structural handicaps such as an excessive number of points of sale. To escape from that difficult market, industry players have been working to develop their presence abroad. In recent years, the food retail segment has seen the unprecedented success of discounters whose twodigit growth has come at the expense of traditional retailers. Hard-discount now represents 40 per cent of food sales. However, their growth has been slowing with a few discounters suffering a decline in non-food turnover.
■
PAYMENT AND COLLECTION PRACTICES Payment Standard payment instruments such as bills of exchange and cheques are not used very widely in Germany. For Germans, a bill of exchange implies a precarious financial position or distrust on the part of the supplier. Cheques are not considered a payment as such but a ‘payment attempt’. As German law ignores the principle of covered cheques, the issuer can cancel payment at any time and on any ground. Bounced cheques are therefore fairly common. Bills of exchange and cheques clearly do not seem to be effective payment instruments even though they entitle creditors to access a fast-track procedure for debt collection. Bank transfer (Überweisung), by contrast, remains the prevalent means of payment. Leading German banks are connected to the SWIFT network, which enables them to provide a quick and efficient funds transfer service. ■
Debt collection The collection process begins with the debtor being sent a final demand for payment, via ordinary or registered mail, reminding the debtor of his or her contractual obligations. The law on ‘speedier
■
50
matured debts’, in force since 1 May 2000, states that, where the due date is not specified in the conditions of sale, the customer is deemed to be in default if he or she does not pay up within 30 days of receipt of the invoice or a demand for payment, and is liable to interest penalties thereafter. From 1 January 2002, the benchmark default interest rate is the Bundesbank’s six-monthly base rate, calculated by reference to the European Central Bank’s refinancing rate, plus eight basis points for retailers or commercial companies and five basis points for consumers (non-commercial). If payment or an out-of-court settlement is not forthcoming despite this approach, the creditor must initiate court proceedings. If the claim is not disputed, the creditor can seek an injunction to pay (Mahnbescheid) through a simplified and inexpensive procedure involving the use of pre-printed forms and resulting in a writ of execution fairly quickly. Foreign creditors must file their claim with the Schöneberg Court in Berlin, which, after examining the claim, may deliver an injunction to pay. The debtor is given two weeks to pay up or challenge the ruling. Ordinary legal proceedings tend to be oral, with the judge reaching his or her decision on the arguments presented by both parties present in
GERMANY court. If the case is contested, the judge hears the litigants or their lawyers and asks them to submit any evidence deemed relevant by him- or herself, which he or she alone is then authorized to assess. Each litigant is also requested to submit a pleading memorandum outlining his or her expectations within the specified time limit. Once the claim has been properly examined, a public hearing is held at which the court hands down a well-founded judgment. The reform of civil procedure, enacted on 1 January 2002, is designed to give all German
citizens quick and effective access to law. The new measures encourage parties to attempt conciliation before resorting to legal action and give the district courts (Amtsgerichte) stronger powers. They also require the majority of cases to be settled in first instance, either through an out-of-court settlement or through a court decision. The appeal court’s role is limited to verifying whether a case involves a question of principle or necessitates revision of the law in order to ensure ‘consistent jurisprudence’.
1
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Germany
250
200
150
100
50
ec -9 4 ne 95 D ec Ju 95 ne 9 D 6 ec -9 Ju 6 ne 9 D 7 ec -9 Ju 7 ne 9 D 8 ec -9 Ju 8 ne 9 D 9 ec Ju 99 ne 0 D 0 ec -0 Ju 0 ne 0 D 1 ec -0 Ju 1 ne 0 D 2 ec -0 Ju 2 ne 0 D 3 ec -0 Ju 3 ne 0 D 4 ec Ju 04 ne 0 D 5 ec -0 5
D
Ju
3 94
Ju
ne
-9
ec D
Ju
ne
93
0
51
EUROPE AND THE CIS
Greece Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
Coface analysis
11.1 207,600 18,770
Short-term: A2
RISK ASSESSMENT After the stimulus of the Olympic Games, economic growth was less dynamic in 2005 with household consumption growing less and investment stagnating. Public spending declined, which led to reduction of a public sector deficit, nonetheless remaining far above Maastricht criteria. A more moderate slowdown appears likely in 2006, reflecting slightly less dynamic private consumption that, although still underpinned by credit expansion, will be undermined by the slower growth of real wages and tighter fiscal policy. Conversely, investment will benefit from lower corporate income tax rates, tax incentives and increasing labour costs. Foreign trade should
continue to make a negative contribution to economic growth despite the firmness of exports and, especially, tourism. Meanwhile, the reduction and control of public spending will continue with measures intended to moderate wages and pensions and limit civil service hiring. That should make it possible to reduce a still-large deficit with the debt burden exceeding 100 per cent of GDP. Weaknesses have persisted in some sectors like clothing, textiles, wood and fruits and vegetables. The Coface payment incident index deteriorated suddenly due a major event that occurred in May/June in the domestic electrical appliances retail sector.
MAIN ECONOMIC INDICATORS
52
%
2001
2002
2003
2004
Economic growth Consumption (var.) Investment (var.) Inflation Unemployment rate Short-term interest rate Public sector balance (% GDP) Public sector debt (% GDP) Exports (var.) Imports (var.) Current account balance (% GDP)
4.6 2.9 8.5 3.5 11.2 4.3 -6.0 114.7 -1.0 -5.2 -8.1
3.8 3.3 7.6 3.7 10.9 3.3 -5.0 112.5 -7.7 -2.9 -7.5
4.6 4.5 16.2 3.4 10.4 2.3 -5.8 109.9 1.0 4.8 -7.2
4.7 4.4 6.8 2.9 11.0 2.1 -6.6 109.3 11.5 9.3 -6.5
2005(e) 2006(f ) 3.5 3.4 1.0 3.5 10.4 2.2 -4.0 108.0 6.5 1.4 -7.0
3.3 3.0 5.0 3.2 10.0 3.2 -3.3 105.5 7.0 4.3 -6.6
e = estimate, f = forecast
GREECE PAYMENT AND COLLECTION PRACTICES
Debt collection The recovery process commences with the debtor being sent a final demand for payment by registered mail reminding the debtor of his or her payment obligations, including any interest penalties that may have been contractually agreed or, failing this, those accruing at the legal rate of interest. Under a presidential decree passed on 5 June 2003, interest is due from the day following the date of payment fixed in the commercial agreement at a rate, unless the parties agree otherwise, equal to the European Central Bank’s refinancing rate plus seven basis points. Creditors may seek an injunction to pay (diataghi pliromis) from the court via a lawyer under
■
a fast-track procedure that generally takes one month from the date of lodging of the petition and, for undisputed claims, results in immediate enforcement of the court order, which generally does not have suspensive effect. To do so, creditors must submit documentary evidence substantiating the claim underlying his or her lawsuit, such as an accepted and protested bill of exchange, an unpaid promissory letter or promissory note, an acknowledgement of debt established by private deed or an original invoice summarizing the goods sold and bearing the buyer’s signature certifying receipt of delivery. Based on competence thresholds in effect since 1 October 2003, a justice of the peace (Eirinodikeio) hears claims up to €12,000. Above that amount, a court of first instance presided over by a single judge (Monomeles Protodikeio) hears claims not exceeding €80,000. A panel of three judges (Polymeles Protodikeio) is set up to hear larger claims. Regarding the latter court with a collegial composition, conforming to the provisions of the civil procedure code, a prior attempt by the parties to settle out of court is obligatory subject to inadmissibility of the applicant’s writ. Where creditors do not have a written acknowledgement signed by the debtor, or where the claim is disputed, the only remaining alternative is to obtain a summons under ordinary proceedings. Such litigation can take over a year, even two years, depending on the backlog of cases in each jurisdiction and the complexity of the action, whether it requires extensive evidence – such as examination of all the documents related to a commercial transaction – and obligatory witness testimonies.
1
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
250
WORLD Greece
200
150
100
50
0
Ju ne 9 D 3 ec Ju 93 ne 9 D 4 ec Ju 94 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 97 D ec Ju 97 ne 9 D 8 ec -9 Ju 8 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 01 D ec Ju 01 ne 0 D 2 ec Ju 02 ne 0 D 3 ec Ju 03 ne 04 D ec Ju 04 ne 0 D 5 ec -0 5
Payment Bills of exchange are widely used by Greek companies in domestic and international transactions and, along with promissory notes, are no longer subject to stamp duty (from 1 January 2002). In the event of payment default, a protest certifying the dishonoured bill must be drawn up by a public notary within two working days of the due date. Cheques, on the other hand, are less widely used in international transactions. For domestic transactions, the practice is to use cheques as a credit rather than payment instrument. Post-dated cheques endorsed by several creditors are fairly common. Furthermore, issuers of dishonoured cheques may be liable to prosecution if a complaint is lodged. Promissory letters (hyposhetiki epistoli) are widely used by Greek companies in international transactions. They are a written acknowledgement of an obligation to pay issued to the creditor by the customer’s bank, committing the maker to pay the creditor at a contractually fixed date. Although letters are a sufficiently effective instrument in that they constitute a clear acknowledgement of debt on the part of the buyer, they are not deemed a bill of exchange and so fall outside the scope of the exchange law (droit cambiare). SWIFT bank transfers, well established in Greek banking circles, are used to settle a growing proportion of transactions and offer a quick and secure method of payment. ■
53
EUROPE AND THE CIS
Hungary Population (million inhabitants) GDP (US$ million)
10.1 82,732
Short-term: A2
Coface analysis
Medium-term: Low risk
STRENGTHS ● Hungary is among Central Europe’s most advanced countries on reforms. ● Its financial system is among the most developed in the region. ● Its infrastructure, labour forces and regulatory framework are of good quality. ● Integration into the EU has enhanced its political and economic stability.
54
WEAKNESSES Public sector finances are still in poor shape with government debt remaining at high levels. ● External accounts have been registering large and persistent imbalances. ● With its open economy, the country is subject to the economic fortunes of its main EU trading partners. ● Covering the country’s financing needs has partly depended on volatile capital, while its foreign exchange reserves have remained relatively low and its foreign debt still relatively high. ●
RISK ASSESSMENT Economic activity remained relatively robust in 2005, buoyed by investments and exports, notably transport and electronic equipment. It should accelerate slightly in 2006, fuelled by increased public spending in the run-up to elections. In that context, the Coface payment incident index for companies has stabilized at a level still below the world average. Economic fundamentals have deteriorated. As regards public-sector finances, increasing slippage has made fiscal policy difficult to foresee, and the public debt burden has grown. The country’s
integration into the euro zone in 2010 has thus seemed very hypothetical. Sovereign default risk has nonetheless stayed relatively low, with the country still benefiting from favourable financing conditions. However, the very poor state of government finances along with high external deficit have increased the risk of a crisis of confidence in the markets and severe pressure on the exchange rate. Political risk has remained limited, even if tensions have been weakening the governing centreleft coalition and even if there seems to be little likelihood of rapid progress on reforms in the wake of the legislative elections scheduled for May 2006.
CONDITIONS OF ACCESS TO THE MARKET ■ Means of entry With EU membership, the last tariff peaks (foodstuffs) have been abolished. Following some
post-accession teething trouble over the adaptation of Community regulations, there are no longer any obstacles to trade in either this sector or others. However, exporters should note the existence of a
HUNGARY MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ billions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Unemployment rate (%) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
3.8 9.2 -3.5 5.7 31.1 33.3 -2.2 -3.2 -6.2 63.7 14.0
3.5 5.3 -8.5 5.8 34.8 36.9 -2.1 -4.7 -7.2 62.0 13.3
2.9 4.7 -6.5 5.9 43.5 46.8 -3.3 -7.2 -8.8 67.8 14.3
4.2 6.8 -5.4 6.1 55.4 58.3 -2.9 -8.8 -8.8 68.8 12.0
3.7 3.7 -6.1 7.1 61.7 64.8 -3.1 -8.7 -7.8 67.4 14.8
4.0 2.7 -5.2 7.0 69.8 73.9 -4.1 -9.4 -7.8 69.0 11.3
3.0
2.6
2.5
2.5
2.5
2.3
1
e = estimate, f = forecast
Foreign exchange regulations Since the widening of the forint’s fluctuation band to +/-15 per cent in May 2001, the Hungarian currency has experienced various fluctuations, rising in January 2003, falling in June and again in December 2003, then climbing to and staying in the top half of its fluctuation band for the next two years, before attaining its ceiling of HUF240 to the euro in April 2005. Since mid-September 2005 however, it has fallen back to HUF253 to the euro (rate in force on 18 October 2005) because of the
■
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Hungary
250
200
150
100
50
-9 Ju 6 ne 97 D ec -9 Ju 7 ne 98 D ec -9 Ju 8 ne 99 D ec -9 Ju 9 ne 00 D ec -0 Ju 0 ne 01 D ec -0 Ju 1 ne 02 D ec -0 Ju 2 ne 03 D ec -0 Ju 3 ne 04 D ec -0 Ju 4 ne 05 D ec -0 5
5 -9
96
ec
ne Ju
D
95
-9
ec
ec
ne
D
4
0
D
Attitude towards foreign investors Investment in Hungary is unrestricted, regardless of the source of funds or size of foreign shareholding. The only restrictions relate to the acquisition of farmland and forests, in respect of which Hungary has obtained a transition period until May 2011, as well as secondary residences, for which there is a derogation until May 2009. The system of investment incentives, revised in 2002, complies with EU competition and public subsidies law. Investment assistance mainly comprises tax incentives and grants for jointly funded projects financed out of Community funds (ie technology modernization schemes, regional
■
hub creation, major supplier consolidation and support services development). There are also some domestic subsidies, such as those offered by the Ministry of Economic Affairs and Transport in respect of research and development and environment-friendly technology application projects.
Ju
fairly expensive and lengthy registration procedure for cosmetics. Similarly, the approval procedure for pesticides imported from other member states is so cumbersome that there have been a number of complaints, with the matter even being referred to the European Commission. Moreover, an ad hoc 25 per cent tax is applied to second-hand cars bought in another member state in contravention of Community rules on equal treatment of goods traded within the EU. Finally, while public procurement legislation complies with Community law, its application is not entirely satisfactory. In addition, tendering procedures at times lack transparency.
55
EUROPE AND THE CIS government’s failure to meet its budget restructuring targets. The currency’s strength and country’s good inflation record have enabled the
central bank to ease monetary policy and cut the intervention rate from 12.5 per cent in November 2003 to 6 per cent in September 2005.
PAYMENT AND COLLECTION PRACTICES Payment Bills of exchange and cheques are not commonly used as their validity depends on compliance with several formal issuing requirements. For dishonoured and duly protested bills and cheques creditors nonetheless have recourse to a summary procedure to obtain an injunction to pay. The promissory note in blanco (üres átruházás), which involves an incomplete payment deed when issued – with only the term promissory note and the issuer’s signature appearing on it – and a complement of missing elements upon collection, is much less common than in Poland. Bank transfers are by far the most common payment method. After successive phases of privatization and concentration, the main Hungarian banks are now connected to the SWIFT network, which provides low-cost, flexible and speedy processing of domestic and international payments.
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Debt collection It is advisable, where possible, to avoid taking legal action locally due to the formalism and high cost of legal procedures and lengthy court proceedings: it takes almost two years to obtain a writ of execution due to the lack of judges with adequate training in market economy practices and proper equipment. Service of a demand for payment accompanied by proof of debt reminds the debtor of his or her obligation to pay the outstanding sum plus any accrued interest. Since 1 May 2004, interest is due from the day after the payment date stipulated in the commercial contract and, unless otherwise agreed by the parties, the applicable rate will be the base rate of the National Bank of Hungary’s (Magyar Nemzeti
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56
Bank) in force on the last day preceding the reference half-year plus seven percentage points. It is advisable to seek an amicable settlement based on a payment schedule drawn up by a public notary, which includes an ‘enforcement clause’ that allows creditors, in case of default by the debtor, to go directly to the enforcement stage, subject to acknowledgement by the court of that document’s binding nature. With positive proof of debt (acknowledgement of debt, unpaid bill of exchange, dishonoured cheque and so on), creditors may obtain an injunction to pay (fizetézi meghagyás) via a lesscostly summary procedure. This action allows the judge – if he or she considers the petition justified – to grant an injunction without hearing the defendant, enjoining him or her to pay the principal and legal costs within 15 days of service of the ruling (or within three days for an unpaid bill of exchange). In case of objection by the debtor, the case is treated as a dispute subject to ordinary proceedings. Ordinary proceedings are partly in writing, with the parties or their attorneys filing submissions accompanied by all supporting case documents (original or certified copies), and partly oral, with the litigants and their witnesses heard on the main hearing date. At any stage of such proceedings and where possible, the judge may attempt conciliation between the parties. It is relatively common practice to issue a winding-up petition against the debtor immediately to prompt a speedier reaction or payment. Commercial disputes are heard either by local courts (Helyi Biróság), acting in a commercial capacity, or by regional courts (Megyei Biróság) depending on the size of the claim.
HUNGARY OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 40 ■ Public consumption 7 ■ Investment 14
1
Exports: 65% of GDP
Imports: 68% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
15000
12000
12000
10000 8000
9000
6000 6000
4000
3000
2000
0
0 Germany
Austria
Italy
France
UK
Germany
Italy
China
Austria
Russia
IMPORTS by products ■ Fuels 6% ■ Chemical products 10% ■ Other manufactured goods 25% ■ Capital goods and transport equipment 53% ■ Miscellaneous 8%
EXPORTS by products ■ All food items 7% ■ Chemical products 7% ■ Other manufactured goods 20% ■ Capital goods and transport equipment 62% ■ Miscellaneous 4%
STANDARD OF LIVING / PURCHASING POWER Indicators
Hungary
GNP per capita (PPP dollars) 13,840 GNP per capita (USD) 6,350 Human Development Index 0.862 Wealthiest 10% share of national income 22.2 Urban population percentage 65 Percentage under 15 years old 16.3 Number of telephones per 1000 inhabitants 349 Number of computers per 1000 inhabitants 108.4
Regional average DC average
7,530 2,580 0.806 30 64 20 228 73.4
4,300 1,280 0.697 33 43 31 112 28.4
57
EUROPE AND THE CIS
Iceland Population (inhabitants) GDP (US$ million) GDP per capita (US$)
Coface analysis
293,000 12,600 43,003
Short-term: A1
RISK ASSESSMENT An overheating economy again marked the year in 2005. Consumption increased at a robust pace due to a very low unemployment rate, which pushed wages higher, and a sharp credit expansion. Investment soared in liaison with the dynamism of the property market and the continuing expansion programmes in the aluminium and hydraulic energy sectors. Imports increased sharply in consequence while exports of manufactured goods suffered amid an appreciation of the Icelandic krona attributable to increases in the central bank’s key rates. It is now incumbent on the central bank to cool down the economy, with the public sector accounts in a largely surplus state making it politically difficult to tighten fiscal policy.
In 2006, the tighter monetary policy will begin to affect consumption via the availability of credit, thus slowing growth somewhat. Investment should level off with the large programmes now completed. Only exports will gain momentum thanks to continued good performance in the tourism and fishing sectors and new aluminium capacity going into operation. Companies generally benefited from the robust economic growth to improve their financial situation. Exporters nonetheless suffered from unfavourable exchange rates that forced them to either cut prices or give up market share. Only the raw materials and fishing sectors avoided that dilemma due to increases in world prices. In 2006 the domestic demand slowdown should be less favourable to them.
MAIN ECONOMIC INDICATORS %
2001
2002
2003
2004
Economic growth Consumption (var.) Investment (var.) Inflation Unemployment rate Short-term interest rate Public sector balance (% GDP) Public sector debt (% GDP) Exports (var.) Imports (var.) Current account balance (% GDP)
3.3 -3.2 -15.1 6.4 2.3 11.0 0.3 47.4 7.7 -9.0 -4.5
-1.3 -1.8 -22.6 5.2 3.3 8.0 -0.8 43.6 3.6 -2.5 1.4
3.6 5.8 28.6 2.1 3.4 5.0 -2.1 41.5 1.4 9.7 -5.0
6.3 6.9 23.0 3.2 3.1 6.1 -0.1 37.0 8.3 14.3 -8.4
2005(e) 2006(f ) 6.5 11.5 56.0 3.9 2.1 9.1 3.5 27.0 4.6 22.0 -14.0
4.8 7.0 -4.0 3.5 1.9 11.0 5.0 23.0 6.8 0.0 -11.0
58 e = estimate, f = forecast
IRELAND
Ireland Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
Coface analysis
4.0 184,500 45,623
1
Short-term: A1
RISK ASSESSMENT Domestic demand underpinned economic activity in 2005. Households increased their spending considerably, buoyed by strong job and wage growth, low interest rates and contained inflation. Companies, including many subsidiaries of American and European firms in the pharmaceutical, high-technology and financial services sectors, further increased their investments. Conversely, foreign trade made a negative contribution to growth amid sluggish European demand. Growth should remain dynamic in 2006. Robust immigration and birth rates, social transfer payments, as well as the maturity (between May 2006 and April 2007) of subsidised savings accounts, will fuel household consumption. Although investment in housing and infrastructures will remain robust, it will
lag behind non-residential and commercial construction. Conversely, productive investment should slow down substantially. Robust domestic demand will again spur imports while exports, buoyed by the European recovery, will resume satisfactory growth, despite higher payroll costs. The growth has benefited companies, particularly subsidiaries of foreign multinationals as evidenced by the continued decline of the Coface payment incident index. The trend should continue in 2006. Bankruptcy has nonetheless remained relatively commonplace in the road transport and construction sectors due to the small size of many players. In a context of stiffer competition, the textile, computer and mechanical engineering sectors have been suffering from excessive production costs.
MAIN ECONOMIC INDICATORS %
2001
2002
2003
2004
Economic growth Consumption (var.) Investment (var.) Inflation Unemployment rate Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)
6.0 9.1 -10.7 4.0 3.9 4.3 0.9 36.1 9.4 7.3 -0.7
6.1 5.8 2.0 4.7 4.4 3.3 -0.2 32.4 4.1 1.9 -1.0
4.4 3.8 2.1 4.0 4.6 2.3 0.2 32.1 0.7 -2.3 0.0
4.5 3.3 8.9 2.3 4.4 2.1 1.4 29.8 7.0 7.5 -0.8
2005(e) 2006(f ) 4.7 4.9 16.8 2.3 4.3 2.2 -0.9 29.0 4.9 4.7 -1.5
4.6 5.3 3.5 2.5 4.2 2.2 -0.6 28.7 5.4 5.8 -1.7
59 e = estimate, f = forecast
EUROPE AND THE CIS PAYMENT AND COLLECTION PRACTICES
Debt collection The collection process usually begins with the debtor being sent a final demand, or ‘seven-day’ letter, by registered mail asking him or her to pay the principal along with any contractually agreed default interest. Where there is no specific interest clause, the rate applicable to commercial contracts concluded after 7 August 2002 (Regulation number 388, 2002) is the benchmark rate, ie the European Central Bank’s refinancing rate, in force before 1 January or 1 July of each year, marked up by seven percentage points and calculated on a daily percentage. For claims exceeding €1,270, creditors may threaten debtors with a statutory demand for the winding up of their business if they fail to pay up within 21 days of a final demand for payment being sent to them (21-day notice). Thereafter the debtor is regarded as insolvent (Companies Act 1963, amended in 1990, section 214). Irish law and the Irish legal system are mainly founded on British ‘common law’ inherited from the past, although separate national legislation has subsequently been developed. In ordinary proceedings, creditors who hold material evidence of their claim (contractual documents, acknowledgement of debt, unpaid bills of exchange) may seek a summary judgment from the court where their claim is not contested. This allows them
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to obtain a writ of enforcement more quickly. If a debtor fails to respond to a civil summons before the district court or a civil bill before the circuit court, the creditor may obtain a judgment by default based on the submission of an ‘affidavit of debt’ without a court hearing. An affidavit of debt is a sworn statement that substantiates the outstanding amount and the cause of the claim. It bears a signature attested by a notary or an Irish consular office. The competent court based on the claim amount at stake – either a district court, circuit court or, for claims exceeding €38,092.14, the high court in Dublin – can grant the applicant the benefit of a summary judgment fast-track procedure where justified by the circumstances of the claim. The creation on 12 January 2004 of a commercial court (as a special high court division), competent to hear commercial disputes exceeding €1 million included in a commercial list or cases related to intellectual property, is intended to provide accurate and rapid examination of the cases submitted. Where defendants answer a summons, assert their rights and refuse to settle their debt, relatively formal plenary proceedings are instituted in which the court gives equal importance to the case documents submitted by the parties and barristers’ arguments as to the oral evidence presented at the main hearing. For claims brought before the district courts (with under €6,348.69 at stake), there is a simplified written procedure, but the accent is mainly on hearing respective litigants’ witnesses. PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
250
WORLD Ireland
200
150
100
50
0
Ju ne 9 D 3 ec Ju 93 ne 9 D 4 ec Ju 94 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 9 D 7 ec Ju 9 7 ne 98 D ec Ju 98 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 01 D ec Ju 01 ne 0 D 2 ec -0 Ju 2 ne 0 D 3 ec Ju 03 ne 0 D 4 ec Ju 04 ne 0 D 5 ec -0 5
Payment Although the use of bills of exchange is uncommon in domestic commercial transactions between Irish companies, they are sometimes used in international trade. The cheque, defined as ‘a bill of exchange drawn on a bank and payable on demand’, is more widely used for commercial transactions, but does not provide a foolproof guarantee as issuing a bouncing cheque is not a criminal offence. On the other hand, SWIFT bank transfers, well established in Irish banking circles, are widely used as they are quick and efficient. Payment orders issued via the website of the client’s bank are a rapidly growing instrument.
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ITALY
Italy Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
Coface analysis
57.5 1,677,900 29,154
Short-term: A2(A3*)
STRENGTHS ● Labour market reform has contributed to increasing the number of jobs and reducing unemployment, but the employment rate for women and seniors has remained low. ● Gradual state withdrawal from the economy has been increasing competition in several sectors (energy, telephone etc) and spurring formation of large companies that operate internationally. ● The pension and health system reform will allow the country to cope more effectively with the aging of the population attributable to the low birth-rate. ● The roughly 200 industrial districts comprising smaller companies with strong sectoral synergies have demonstrated great adaptability, even if they have difficulty embracing new technologies.
RISK ASSESSMENT The economy began to grow again in spring 2005, thanks largely to the beneficial effects of the euro depreciation on industrial exports. The recovery of spending by households has not been as marked despite continual improvement in the employment picture and appreciation of both their financial and real property assets. The upturn should firm up in 2006. Exports will benefit from more buoyant economic conditions in Europe and the euro’s sharp decline, despite the offsetting effects of competition from emerging *for export companies
1
WEAKNESSES The loss of export competitiveness is attributable to poor sectoral and geographic specialization and insufficient productivity gains. ● Tax evasion and the grey economy not only do not contribute to public sector financial recovery or debt repayment, they also increase the tax and social contributions borne by reported income. ● Ponderous and costly administrative and legal procedures, financial scandals and a lack of competition in retailing and services have not been conducive to investment. ● The south has often lacked a level of infrastructure and public services that could allow it to overcome its lack of productivity. ● The tourist sector has been suffering from competition from the new European destinations, even if the high end has been holding up well. ●
countries and a lack of price competitiveness. Household consumption should increase slightly again thanks to accommodating tax policy in the runup to legislative elections and the transformation of many fixed-term employment contracts into permanent contracts. However, the need to consolidate public finances will remain a constraint. Meanwhile, despite more buoyant demand and a reduction of social contributions, companies will still not significantly increase their investments, even though a lack of spending on research and development has undermined their competitiveness.
61
EUROPE AND THE CIS MAIN ECONOMIC INDICATORS %
2001
2002
2003
2004
Economic growth Consumption (var.) Investment (var.) Inflation Unemployment rate Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)
1.7 0.8 1.0 2.3 9.1 4.3 -3.2 122.0 1.6 0.5 -0.1
0.4 0.4 -0.1 2.6 8.6 3.3 -2.9 121.5 -3.4 -0.2 -0.8
0.4 1.4 -4.7 2.8 8.4 2.3 -3.3 120.9 -1.9 1.3 -1.4
1.1 1.0 1.8 2.2 8.1 2.2 -3.2 123.0 3.2 2.5 -0.8
2005(e) 2006(f ) 0.1 0.9 -1.0 2.1 7.8 2.1 -4.3 122.0 0.2 2.6 -1.6
1.1 1.2 2.0 2.0 8.3 2.4 -3.8 121.0 4.2 4.0 -1.4
e = estimate, f = forecast
Foreign investors could remain hesitant after the alleged favouritism in the bidding war over the Banca Antonveneta acquisition, which came on the heels of the Cirio and Parmalat bankruptcies. The Coface payment incident index, although improving slightly, has remained far above the world average. The frequency of payment incidents has remained high for export companies, hampered by a sectoral and geographic specialization exposing them to stiff competition from Asian countries.
Competitive devaluations to offset a lack of productivity and increasing production costs are no longer an option. Textiles, leather, home appliances, the car industry and printing/publishing have been the weakest sectors. The situation of companies focusing on the domestic market has been relatively better. Although better protected, notably in services, retail and the building industry, those companies must nonetheless cope with sluggish household demand.
MAIN ECONOMIC SECTORS Food Production was stable in 2005, whereas exports registered modest growth. Although producer prices rose sharply, retail prices remained unchanged, squeezing margins and demonstrating the dominance of distributors in contractual relationships. Even if company solvency has not been an immediate source of concern, a few elements of uncertainty, like the consumption trend, competitiveness in foreign markets and the repercussions of the Common Agricultural Policy (CAP) overhauls on supply costs, have been clouding the outlook.
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Car industry The FIAT group has defended with difficulty its market share in Italy and Europe. It now expects the launch of new models to end several years of crisis.
Although the group’s financial improvement has been an encouraging sign for 2006, risks associated with still-stagnant demand and fierce competition from other carmakers should not be underestimated. Electronics and electrical engineering Although the production of lamps and lighting systems has been showing signs of recovery, many other segments have continued to register disappointing performance. Except for a few centres of excellence, most companies have been suffering from a lack of competitiveness as regards not only costs but also research and development.
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62
Mass distribution All protagonists have, to varying degrees, begun to feel the effects of the private consumption downturn.
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ITALY Megastores and supermarkets have been dead in the water and competing for market share via promotional campaigns. Although hard-discount seems to have exhausted its development potential, the larger chains have continued to open new stores. Only a substantial increase in household consumption could improve that situation. Textiles, clothing, leather, fur and shoes The textile and clothing sector seems to be stabilizing, even with business down from 2004 and persistent problems like sluggish demand and competition from Asian products. The performance of exports to countries outside the EU has been registering moderate improvement. Although
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operators have been demonstrating some optimism on the outlook for 2006, the recovery process will be long. The situation of the leather and shoe segments has been even worse as borne out by the particularly negative trend on production volumes and prices. Metallurgy and mechanical engineering Production declined slightly overall in 2005. However, although metallurgy succeeded in sustaining a positive trend thanks to steel production, mechanical engineering has encountered problems, notably in the domestic electrical appliances and industrial machinery segments. Exports have been barely growing. Business is expected to level off in 2006.
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1
PAYMENT AND COLLECTION PRACTICES Payment Trade notes (cambiali) are available in the form of bills of exchange or promissory notes. Cambiali must be duly accepted by the drawee and stamped locally at 12/1,000 of their value or at 6/1,000 if stamped beforehand in France. In case of default, they constitute de facto enforcement orders as the courts automatically admit them as a writ of execution (ezecuzione forzata) against the debtor. Signed bills of exchange are a fairly secure means of payment but are rarely used on account of the high stamp duty, the somewhat lengthy cashing period and the drawee’s fear of damage to his or her reputation caused by the recording and publication of protested unpaid bills at the chambers of commerce. Cheques too are in widespread use since the legislation on cheque amounts was relaxed in April 1990. However, to be cashed abroad, they must bear the wording non trasferibile and include the date and place of issue. Bank vouchers (ricevuta bancaria) are not a means of payment, but merely a notice of bank domicile drawn up by the creditor and submitted by the creditor to his or her own bank for presentation to the debtor’s bank for the purposes of payment (the vouchers are also available in electronic form, in which case they are known as Ri.Ba. elettronica). Courts may accept bank ■
vouchers, if signed by the buyer, as acknowledgement of debt. However, they do not have the force of a writ of execution. Bank transfers are widely used (90 per cent of payments from Italy are made by bank transfer) and, in particular, SWIFT transfers, as they are considerably faster than ordinary transfers. The bank transfer is a cheap and secure means of payment once the contracting parties have established mutual trust. Debt collection As elsewhere, an out-of-court settlement is always preferable to legal action. Demands and telephone dunning are quite effective, as are on-site visits that provide an opportunity to restore dialogue between supplier and customer, and so to conclude a settlement. Settlement negotiations focus on payment of the principal, plus any contractual default interest as may be provided for in writing and accepted by the buyer. Where there is no such agreement, the rate applicable to commercial agreements concluded after 8 August 2002 (Decree-Law of 9 October 2002) is the sixmonthly rate set by the Ministry of Economic Affairs and Finance by reference to the European Central Bank’s refinancing rate, increased by seven percentage points.
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63
EUROPE AND THE CIS Failing an out-of-court settlement with the customer, the type of legal action taken will depend on the type of documents justifying the claim. Based on cambiali notes – bills of exchange, promissory notes – or cheques, creditors may proceed directly with forced execution beginning with a demand for payment (atto di precetto) served by a bailiff preliminary to attachment of the debtor’s moveable and immoveable property barring receipt of actual payment within the allotted time. The resulting auction proceeds will be used to discharge outstanding claims. Creditors can obtain an injunction to pay (decreto ingiuntivo) via a fast-track procedure if
they can produce, besides invoice copies, written proof of the claim’s existence. The injunction issued by the court will also specify the amount of legal costs, according to an established schedule, payable by the debtor. Lacking the requisite supporting documents, a creditor must take ordinary legal action to establish his or her right to payment, a process still considered slow despite the civil procedure reform adopted in May 1995. Such proceedings can take up to two years, although the applicant may obtain, during that period, a provisional payment order equivalent to a writ of execution.
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Italy
250
200
150
100
50
64
ec -9 4 ne 9 D 5 ec Ju 95 ne 9 D 6 ec -9 Ju 6 ne 9 D 7 ec -9 Ju 7 ne 9 D 8 ec Ju 98 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 0 D 1 ec Ju 01 ne 0 D 2 ec -0 Ju 2 ne 0 D 3 ec -0 Ju 3 ne 0 D 4 ec Ju 04 ne 0 D 5 ec -0 5 Ju
3 94 ne
D
-9
ec
Ju
D
Ju
ne
93
0
KAZAKHSTAN
Kazakhstan Population (million inhabitants) GDP (US$ million)
14.9 29,749
1
Short-term: B
Coface analysis
Medium-term: Moderately high risk
STRENGTHS ● With natural wealth like oil and metals and a policy of opening the economy to foreign capital, Kazakhstan has become the region’s most attractive country for foreign direct investment. ● Construction of pipelines should spur a sharp increase in oil exports and ultimately some market diversification (Russia, the West via Turkey, and China). ● President Nazarbaev has been able to develop balanced policy toward Russia, China and the West.
RISK ASSESSMENT Driven by oil-sector development, the economy has been sustaining high growth. Abundant foreign exchange reserves coupled with the decision to open the energy sector to foreign companies have fostered remarkable hydrocarbon export growth. Relatively effective distribution of oil-export earnings has benefited various economic sectors except farming, where performance has remained poor. The country’s financial situation has, moreover, been very comfortable thanks to tight fiscal policy, substantial external account surpluses and an influx of foreign investment. Debt ratios have been declining in consequence despite the growth of debt held by private banks and companies, which will bear watching.
WEAKNESSES Economic conditions and public sector finances have been vulnerable to raw material prices, particularly for hydrocarbons. ● The oil sector has captured the lion’s share of investment, which has not been very conducive to the necessary diversification of industry. ● The presence of extensive corruption could hamper the country’s developments and has sometimes complicated matters in its dealings with foreign investors. ● The ultimate succession to President Nazarbaev has been an element of uncertainty. ●
The political environment and governance have been the main weaknesses of a Kazakhstan still characterized by limited transparency with oilexport earnings generating substantial corruption. The ‘colour revolutions’ across the CIS – particularly in neighbouring Kyrgyzstan – have prompted a certain hardening of the regime. Although disputed, the December 2005 presidential elections have nonetheless strengthened the political base of President Nazarbaev, who has received some credit for the country’s robust economic growth, stability and major economic reforms.
65
EUROPE AND THE CIS MAIN ECONOMIC INDICATORS US$ billions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2001
2002
2003
2004
2005(e) 2006(f )
13.5 6.4 2.7 9.1 7.9 1.2 -1.2 -6.4 70.5 25.5
9.8 6.6 1.4 10.0 8.0 2.0 -1.0 -4.7 78.5 25.8
9.3 6.8 2.9 13.2 9.6 3.7 -0.3 -1.2 76.2 20.3
9.4 6.7 2.7 20.6 13.8 6.8 0.5 1.8 76.6 28.5
9.0 8.6 2.6 26.4 16.5 9.9 1.4 3.3 68.0 25.5
8.7 6.4 1.5 32.5 21.5 11.0 1.6 3.1 63.9 24.5
2.5
2.9
3.8
4.9
4.9
5.0
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview Nearly 14 years after gaining independence on 16 December 1991, Kazakhstan has yet to complete its reform programme, despite its ‘good pupil’ image. A candidate for WTO accession, the country is riddled with corruption, bureaucracy, an inefficient tax system and glaring social cleavages. It has, nevertheless, made great strides in public sector privatization – albeit in somewhat untransparent conditions – and trade liberalization. Other signs of progress are the growing volume of net FDI (US$28 billion at end-2004) and the country’s rising foreign trade surplus driven by sales of oil, gas, ores and metals, of which the country has abundant reserves.
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Means of access Despite its designation as a market economy by the EU in 2000 (and by the United States in 2002) and its mildly protectionist policies, landlocked Kazakhstan remains a difficult place in which to do business. With a view to WTO accession, customs duties in the non-farm sector average around 8.6 per cent plus 15 per cent VAT calculated on the customs value. Tariff peaks persist for steel (15.2 per cent), toys (15.3 per cent) and furniture (10.2 per cent). Customs clearance is marred by illegal practices. A number of products are also subject to certification. The fact that
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66
certificates from non-CIS countries are not valid in Kazakhstan makes import formalities cumbersome. Foreign businesses should make allowance for corruption, even though it is not systematic. Attitude towards foreign investors Kazakhstan has the biggest volume of FDI in the CIS after Russia. Foreign investor interest is driven by the country’s oil and gas reserves and undeniable political stability. A new law passed in January 2003 strengthens the government’s interventionist powers during a downturn. Heavier oil taxation introduced in early 2004 was slightly eased in 2005. In early 2005, retroactive legislation was passed granting the state a purchase option over ore extraction. Generally speaking, the sustained improvement in the country’s economic situation, which is extremely vulnerable to international economic trends and fluctuations in the price of oil, has increased tensions between the state and foreign investors as the government becomes aware of the country’s potential. The private sector and retailing are, for their part, flourishing on the back of three years of strong economic growth. However, experience shows that investors would do well to take every legal precaution before entering into a joint venture agreement with local partners.
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KAZAKHSTAN OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 39 ■ Public consumption 8 ■ Investment 19
1
Exports: 50% of GDP
Imports: 44% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
35000
2500
30000
2000
25000 1500
20000
1000
15000 10000
500
5000
0
0 Bermuda Russia Switzerland China
Italy
Russia
Germany China
USA
Ukraine
IMPORTS by products ■ All food items 8% ■ Fuels 11% ■ Chemical products 12% ■ Other manufactured goods 26% ■ Capital goods and transport equipment 41% ■ Miscellaneous 3%
EXPORTS by products ■ All food items 6% ■ Chemical products 61% ■ Ores and metals 14% ■ Other manufactured goods 13% ■ Miscellaneous 6%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1,000 inhabitants Number of computers per 1,000 inhabitants
Kazakhstan 6,280 1,780 0.761 24.4 56 24.5 130 n/a
Regional average DC average 7,530 2,580 0.806 30 64 20 228 73.4
4,300 1,280 0.697 33 43 31 112 28.4
67
EUROPE AND THE CIS
Kyrgyzstan Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
5.1 1,909 374
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT The March 2005 Tulip Revolution and July presidential elections, which resulted in the victory of Kurmanbek Bakiev and the appointment as prime minister of his chief rival, Felix Koulov, have not brought the political stability expected. The real opposition between the two men reflects a profound north–south geographic cleavage and constitutes a risk factor. The general climate has remained very tense as evidenced by the murders of deputies and the repeated demonstrations by opposition parties. That climate of uncertainty has affected an already shaky economic situation. The decline of gold production and uncertainties linked to the
political transition during the Tulip Revolution caused a marked growth slowdown in 2005. The formal sector is not very developed with the exception of gold, cotton and a tourism industry that is still in its infancy. The country’s main resources are still expatriate remittances, mainly from Kazakhstan and Russia, smuggling of Chinese products and international aid. In that respect, the restructuring of foreign debt in the Paris Club framework and backing by the IMF have eased the financial situation of a very indebted country that lacks, unlike its neighbours, any hydrocarbon resources. The start-up of precious metal production in two new mines has nonetheless improved the growth outlook for 2006.
MAIN ECONOMIC INDICATORS US$ millions
68
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2001
2002
2003
5.3 6.9 -5.2 480.3 440.3 40 -1.5 100.0 13.0
0.0 2.0 -5.6 498.0 552.0 -54 -2.6 98.8 10.0
7.0 3.0 -5.4 590.0 724.0 -134 -2.8 95.1 8.0
3.8
4.0
4.1
2004
2005(f ) 2006(f )
7.1 3.0 4.0 4.0 -4.2 -4.6 733.0 738.0 904.0 1,023.0 -171 -285 -3.2 -6.0 88.7 83.5 11.0 19.0 5.5
5.1
5.0 5.0 -3.6 793.0 1,135.0 -342 -4.4 78.2 15.0 4.9
e = estimate, f = forecast
LATVIA
Latvia Population (million inhabitants) GDP (US$ million)
2.3 11,073
1
Short-term: A3
Coface analysis
Medium-term: Low risk
STRENGTHS ● The implementation of strict policies and broad reforms has been essential to the country’s excellent growth performance. ● Admission to the EU has enhanced Latvia’s economic stability. ● Trade and financial services have continued to demonstrate substantial development potential. With its pivotal role in East–West trade, the country has rapidly modernized its transport and telecommunication sectors. ● The workforce is skilled. ● Public sector debt has remained under control.
RISK ASSESSMENT Buoyed by domestic demand, notably investment, economic activity remained robust in 2005. Growth should sag in 2006 amid a credit slowdown, with companies and households attempting to consolidate their financial situations. The growth dynamism, in a context of trade liberalization, has resulted in a large current account deficit, covered to a large extent by FDI. However, privatization has been slowing down and borrowing by local banks from their parent companies, as well as short-term deposits by non-residents, has caused
WEAKNESSES The large current account deficit, linked to the low rate of domestic savings in a context of a substantial investment effort, has been the main risk factor. ● The foreign debt burden, notably short-term, has been increasing sharply. ● The country has registered one of the highest inflation rates among new EU members. ● Per capita income has been among the lowest in the EU. ●
foreign debt to rise. The substantial amount of those deposits has increased the country’s vulnerability to capital flight, even with those deposits invested abroad in quality liquid assets. The country joined the EU’s exchange-rate mechanism (ERM2) and should join the euro zone in 2008, provided it substantially reduces inflation. It currently meets Maastricht fiscal criteria. Although weak, the centre-right government coalition should stay in power until the end-2006 elections, which will be unlikely to change the political landscape significantly.
69
EUROPE AND THE CIS MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ millions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Unemployment rate (%) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
8.0 2.5 -2.1 12.8 2,243 3,578 -1,335 -626 -7.6 67.7 12.7
6.4 1.8 -2.3 11.6 2,545 4,024 -1,479 -621 -6.7 76.5 13.7
7.2 2.9 -1.2 10.3 3,171 5,174 -2,003 -917 -8.3 84.4 9.8
8.3 6.2 -0.9 10.1 4,185 6,935 -2,750 -1,673 -12.3 97.8 13.0
8.5 6.6 -1.2 n/a 5,775 8,590 -2,815 -1,396 -9.9 109.8 7.2
6.8 4.5 -1.5 n/a 6,970 9,765 -2,795 -1,403 -9.0 113.1 8.8
3.1
3.0
2.6
2.6
2.3
2.2
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview With a population of 2.3 million, Latvia was the poorest country within the enlarged EU in 2004. Per capita GDP is some 55 per cent lower than the European average in terms of purchasing power parity, while the average wage is €300. The country’s GDP is rising steadily and quickly, however, recently, this has been accompanied by strong inflation.
■
Means of entry The Latvian market is open and highly competitive and there are no protectionist measures of note. A WTO member since February 1999, Latvia is one of the ten new members that joined the EU on 1 May 2004 and so applies the common external tariff. Such import prohibitions as do exist are common to all member countries. The country’s intellectual property laws remain a trifle unsatisfactory. Entry into the EMU, due on 1 January 2008, is the next stage of government policy.
■
Attitude towards foreign investors The country is open to foreign investors, with FDI covering 33 per cent of the current deficit. Since
■
70
2004, Latvia has one of the lowest rates of corporation tax in the enlarged EU (15 per cent, compared with 19 per cent in 2003, 22 per cent in 2002 and 25 per cent in 2001). The new Labour Code, adopted in 2002, is in line with European directives. Social security contributions in general amount to 33.09 per cent of wages, with 26.09 per cent borne by the employer and 9 per cent by the employee. A bilateral double taxation treaty has been in force since 1 May 2001. Foreign exchange regulations Following the pegging of the lat to the euro on 1 January 2005 and entry into ERM2 on 29 April 2005, the central rate adopted in June 2004 (LVL0.72804:€1) remains unchanged. The Latvian central bank has decided to narrow the lat’s fluctuation band against the euro from 15 per cent down to 1 per cent of the central rate. Henceforth, the currency’s exchange rate should fluctuate between LVL 0.695776 and LVL 0.709832 to the euro. Adoption of the euro in January 2008 could yet be compromised unless the inflation rate is drastically reduced – in fact the only convergence criterion that Latvia cannot meet by 2008.
■
LATVIA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 39 ■ Public consumption 11 ■ Investment 20
1
Exports: 47% of GDP
Imports: 57% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
500
1000
400
800
300
600
200
400
100
200
0
0 UK
Germany Sweden Lithuania Estonia
Germany Lithuania Russia
Finland
Estonia
IMPORTS by products ■ All food items 12% ■ Fuels 9% ■ Chemical products 12% ■ Capital goods and transport equipment 31% ■ Other manufactured goods 31% ■ Miscellaneous 5%
EXPORTS by products ■ All food items 9% ■ Agricultural raw materials 27% ■ Chemical products 6% ■ Other manufactured goods 44% ■ Capital goods and transport equipment 9% ■ Miscellaneous 6%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1,000 inhabitants Number of computers per 1,000 inhabitants
Latvia 10,210 4,400 0.836 26.1 60 15.1 285 188
Regional average DC average 7,530 2,580 0.806 30 64 20 228 73.4
4,300 1,280 0.697 33 43 31 112 28.4
71
EUROPE AND THE CIS
Lithuania Population (million inhabitants) GDP (US$ million)
3.5 18,215
Short-term: A3
Coface analysis
Medium-term: Low risk
STRENGTHS ● The country has rapidly modernized its economy, successfully met the challenges of integration into the EU and has enjoyed a period of strong, non-inflationary growth. ● Lithuania has a skilled workforce as well as a favourable institutional environment and geographic situation. ● The litas–euro peg and the country’s limited public sector debt should facilitate adoption of the single currency. ● The ethnically homogeneous population is a stabilizing factor.
RISK ASSESSMENT Private consumption and investment have continued to drive growth. Domestic demand should gradually benefit from the implementation of projects backed by the EU and co-financed by the country. Continued import growth could nonetheless impede economic activity in 2006. Deterioration of external accounts, amid dynamic buying abroad and increased repatriation of investment earnings, has been an important source of weakness. The trade growth rate will continue to largely depend on the stability of Russian oil supplies to the Mazeikiu Nafta refinery, the country’s leading exporter. With FDI covering only a small part of its financing needs, Lithuania has been increasingly borrowing abroad,
72
WEAKNESSES The size of the current account deficit has been the main risk factor with the country increasingly reliant on foreign debt in a context of limited direct investment. ● Short-term debt has been high in relation to foreign exchange reserves. ● Unemployment has remained relatively high. ● To improve productivity over the long haul, further reform is needed on taxes, the social safety net and labour market flexibility. ●
particularly in the short term. Foreign exchange reserves have been relatively limited. Foreign debt has been stable in relation to GDP with the country continuing to enjoy access to capital markets on favourable terms. Despite increasing inflation and more accommodating fiscal policy, the country should be capable of complying with the Maastricht criteria and could adopt the single currency within two years. Politically, the centre-left coalition’s weakness, although complicating the government’s task, notably on fiscal matters, has not jeopardized the country’s major economic policy options.
LITHUANIA MAIN ECONOMIC INDICATORS US$ millions Economic growth (%) Inflation (%) Public sector balance (%GDP) Unemployment rate (%) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2005(e) 2006(f )
2001
2002
2003
2004
6.4 1.3 -2.0 17.4 4,889 5,997 -1,108 -574 -4.7 43.4 32.6
6.8 0.3 -1.4 13.8 6,028 7,343 -1,315 -721 -5.1 43.9 37.1
10.5 -1.2 -1.2 12.4 7,658 9,362 -1,704 -1,278 -6.9 45.0 18.5
7.0 1.2 -1.4 11.4 9,305 11,688 -2,382 -1,724 -7.7 46.6 23.1
6.5 2.7 -2.7 11.3 11,140 13,530 -2,390 -1,970 -7.9 47.1 24.7
5.6 2.4 -2.4 n/a 12,410 15,000 -2,590 -2,350 -8.5 46.3 22.0
2.7
3.3
3.6
3.0
2.6
2.4
1
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview The country continues to post strong economic growth, convergence is making progress and purchasing power is rising. The average wage in autumn 2005 was about €380. Domestic consumption is the main motor of growth, while investment continues to soar.
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Means of entry Since EU accession on 1 May 2004, Lithuania has been a member of the European single market. It is today a very open and competitive market. Excise duties and levies apply to a mere handful of products, including alcoholic beverages and oil. Certain products may be imported only by licence holders. It is no longer difficult to obtain a licence, particularly for alcoholic beverages. A new EU-compliant public procurement law has been in force since early 2003. Competition law is also in line with EU criteria. From now on, it will be important to monitor the application of those laws. For settlements, bank transfers and short-term credit are increasingly used and have all but replaced pre-payment and documentary credit. Company ratings information is available, among others, from Coface, which has a subsidiary in Lithuania.
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Attitude towards foreign investors The principle of national treatment is applied to foreign investors and there are no cases of discrimination to report. Lithuania remains attractive to foreign investors largely because of the 15 per cent corporation tax. Those who have met their tax obligations are free to repatriate profits, income and dividends derived from their activities. The workforce is highly skilled and wage costs are low. The service sector offers the highest wages. Employer and employee social security contributions – payable to the country’s social security agency, Sodra – are 31 per cent and 3 per cent of gross wages respectively. Foreign investors in general appreciate the overall business climate in Lithuania. A combination of factors makes the country attractive: proper regulatory framework, low taxation, good infrastructure, skilled labour and low labour costs.
■
Foreign exchange regulations The Lithuanian currency, the litas, has been tied to the euro at a fixed rate (€1:LTL3.4528) since 1 February 2002. Numerous Lithuanian firms hold euro-denominated accounts. Lithuania entered ERM-2 in June 2004 and, subject to compliance with existing criteria, is due to join the euro zone in early 2007.
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73
EUROPE AND THE CIS OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 40 ■ Public consumption 13 ■ Investment 13
Exports: 54% of GDP
Imports: 60% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
1000
2500
800
2000
600
1500
400
1000
200
500
0
0 Switzerland Russia Germany Latvia
UK
Russia
Germany Poland
Italy
France
IMPORTS by products ■ All food items 8% ■ Fuels 17% ■ Chemical products 11% ■ Other manufactured goods 24% ■ Capital goods and transport equipment 34% ■ Miscellaneous 6%
EXPORTS by products ■ All food items 12% ■ Fuels 19% ■ Chemical products 7% ■ Other manufactured goods 29% ■ Capital goods and transport equipment 26% ■ Miscellaneous 6%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1,000 inhabitants Number of computers per 1,000 inhabitants
74
Lithuania 11,390 4,500 0.852 24.9 69 17.1 239 109.7
Regional average DC average 7,530 2,580 0.806 30 64 20 228 73.4
4,300 1,280 0.697 33 43 31 112 28.4
LUXEMBOURG
Luxembourg Population (inhabitants) GDP (US$ million) GDP per capita (US$)
Coface analysis
452,000 31,900 70,575
1
Short-term: A1
RISK ASSESSMENT Economic activity remained dynamic in 2005 despite a slight slowdown. The steadiness of service exports, notably financial, fuelled the growth, which offset sagging exports of steel products whose production fell sharply. Investment was sluggish except in property. Higher energy prices, the raising of excise taxes and increased unemployment affected household consumption. In 2006, more robust household and company spending should underpin growth. Consumption should improve despite rising unemployment thanks to the increased disposable income generated by the indexation of wages to inflation. This, however, will ultimately entail the risk of eroding export competitiveness. Industrial production growth should lead to an investment
recovery. The euro zone and domestic demand recoveries will spur foreign trade, which still largely depends on financial services. After widening in 2005, the fiscal deficit should remain at significant levels. Public sector debt will nonetheless remain particularly low. Bankruptcies increased in 2005 after declining for several consecutive years. Reflecting that trend, the Coface payment incident index also deteriorated. However, the various economic sectors present sharp differences. Financial services and services provided to companies have posted excellent earnings performance. Conversely, in the hotel-food service industry, transport, textiles and fine leather, company solvency deteriorated notably. In civil engineering, the dynamism of housing has been offsetting a slumping public works segment.
MAIN ECONOMIC INDICATORS % Economic growth Consumption (var.) Investment (var.) Inflation Unemployment rate Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)
2001
2002
2003
2004
1.5 5.1 10.5 2.4 2.1 4.3 6.2 5.5 1.8 3.7 9.0
2.5 3.2 0.4 2.1 3.0 3.3 2.1 5.7 -0.6 -2.6 11.8
2.9 1.2 -3.9 2.5 3.8 2.3 0.2 4.9 1.8 1.6 6.8
4.5 1.1 2.9 3.2 4.2 2.1 -0.6 6.6 7.7 7.8 11.1
2005(e) 2006(f ) 3.5 1.2 1.5 3.2 4.6 2.2 -2.3 6.8 5.5 5.3 5.9
3.7 2.5 5.0 3.9 5.1 2.2 -2.1 7.0 7.1 7.0 6.1
75 e = estimate, f = forecast
76 ne
93 3 94
-9
Ju
ec -9 4 ne 9 D 5 ec Ju 95 ne 9 D 6 ec -9 Ju 6 ne 9 D 7 ec -9 Ju 7 ne 9 D 8 ec Ju 98 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 0 D 1 ec Ju 01 ne 0 D 2 ec -0 Ju 2 ne 0 D 3 ec -0 Ju 3 ne 0 D 4 ec Ju 04 ne 0 D 5 ec -0 5
D
Ju
ec
ne
D
Ju
EUROPE AND THE CIS PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995)
300
250
WORLD Luxembourg
200
150
100
50
0
MACEDONIA
Macedonia Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
2.1 4,666 2,222
1
Short-term: C
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT Fiscal discipline and the euro exchange-rate peg have made it possible to reduce public sector debt and inflation. However, backlogs have developed on reform implementation. The resulting lack of competitiveness has hampered economic growth, kept unemployment at high levels and caused a notable current account deficit to persist. Exports are still not very diversified and thus continue to focus on metals and textiles. An industrial sector recovery has nonetheless caused economic activity to accelerate slightly. The current growth rate should persist in 2006 thanks to the decline of real interest rates and increased inflows of foreign investment.
Government authorities plan to implement an ambitious reform programme under IMF aegis to improve the business environment and durably consolidate public sector finances. Politically, much progress has been made since the signing of the Ohrid Framework Agreement in 2001 that put an end to interethnic confrontations with the implementation of a law on decentralization conferring broad autonomy to the ethnic Albanian minority. The Brussels Commission issued a positive opinion on the progress made and recommended that the European Council grant EU candidate status to Macedonia.
MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ millions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
-4.5 5.5 -7.2 1,155 1,682 -526 -7.1 42.7 14.4
0.9 1.8 -5.6 1,112 1,917 -804 -9.4 44.4 15.7
2.8 1.2 -0.7 1,359 2,211 -852 -6.0 42.4 13.8
2.9 -0.4 0.3 1,672 2,784 -1,112 -7.9 44.8 10.1
3.8 0.7 -1.5 2,050 3,196 -1,146 -4.4 46.7 11.6
4.0 1.5 -1.3 2,253 3,425 -1,172 -4.1 44.9 18.2
4.4
3.8
4.1
3.3
3.8
4.1
77 e = estimate, f = forecast
EUROPE AND THE CIS
Malta Population (inhabitants) GDP (US$ million) GDP per capita (US$)
399,000 4,302 10,782
Short-term: A3
Coface analysis
Medium-term: Low risk
RISK ASSESSMENT With a very open financial system and a lack of competitiveness, the economy has struggled to recover from the shocks that have affected tourism and semi-conductor sectors since 2001. Exports have been suffering from competition from Asian countries and the emergence of new tourist destinations, notably in Central Europe. Other factors have also adversely affected growth including the restructuring of the manufacturing sector, the low employment rate and low labour productivity. Despite a slight improvement linked to the strengthening of investment, especially through
the implementation of infrastructure projects, economic growth is still below its potential. Although a large external account deficit has persisted, direct investment and other durable inflows have been providing the financing thus required. Meanwhile, the public sector deficit has eased due to better control over spending, reform of the semi-public sector and increases in some taxes. Durably improving government finances remains a major challenge with admission to the euro zone expected in 2008 and public sector debt still high (about 75 per cent of GDP).
MAIN ECONOMIC INDICATORS US$ millions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
78
2005(e) 2006(f )
2001
2002
2003
2004
0.2 2.5 -6.6 2,002 2,568 -566 -4.4 58.8 4.5
0.8 2.7 -5.8 2,311 2,668 -357 0.3 47.0 3.7
-1.9 1.9 -10.4 2,502 3,200 -697 -5.8 45.2 3.0
0.4 2.7 -5.1 2,688 3,560 -871 -10.2 42.0 3.3
1.5 2.4 -3.7 2,672 3,650 -978 -10.5 42.7 3.4
1.8 1.9 -2.3 2,793 3,756 -964 -8.6 43.0 3.4
4.9
6.3
6.7
5.9
5.5
5.3
e = estimate, f = forecast
MOLDOVA
Moldova Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
4.2 1,964 468
1
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT Growth remained strong in 2005, fuelled mainly by consumption and construction, stimulated in turn by transfers from Moldovan workers residing abroad. The government’s financing difficulties have kept the public sector deficit at moderate levels. In 2006, the economy could falter, due notably to inadequate investment still hampered by a lack of reforms and an unfavourable business environment. External accounts have continued to deteriorate amid buoyant domestic demand. They continue to depend on the Russian market and sales of low valueadded food products, while Moldova has to rely on imports to cover almost all its energy products needs. New restrictions imposed by Russia, the continued rise of spending on energy, a decline of food prices or
deterioration of weather conditions could cause a greater-than-expected widening of an already-gaping trade deficit. Moreover, the external debt burden, although declining, has remained large for Europe’s poorest economy. The Communist Party, which won the elections of March/April 2005, continues to dominate the political scene. Implementation of the Action Plan agreed with the EU in February 2005 should remain one of its main objectives. The EU could also get more actively involved, particularly in efforts to resolve the conflict with the virtually autonomous region of Transnistria. However, the government’s limited appetite for reform, already depriving the country of IMF financial aid, could hamper implementation of the agreed Action Plan.
MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ millions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
6.1 9.8 -0.3 567 880 -313 -2.3 105.6 16.4
7.8 5.3 -0.9 660 1,038 -378 -4.3 101.1 18.5
6.3 11.6 0.2 805 1,429 -623 -6.7 89.5 13.2
7.3 12.4 -1.5 995 1,754 -758 -4.4 63.3 13.2
7.5 12.0 -2.5 1,040 2,230 -1,190 -5.8 54.4 10.2
5.5 10.0 -2.0 1,180 2,700 -1,520 -5.2 48.8 10.0
2.3
2.3
2.0
2.5
2.4
2.4
e = estimate, f = forecast
79
EUROPE AND THE CIS
The Netherlands Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
Coface analysis
16.3 579,000 35,576
Short-term: A2
RISK ASSESSMENT In 2005, economic activity stagnated amid sluggish consumption and investment and a loss of export competitiveness. Household consumption’s lack of dynamism is attributable to contraction of the job market, wage moderation, increased taxes and higher pension contributions. Companies have elected to consolidate their balance sheets to the detriment of investment. Anxious to limit the public sector deficit, the government has continued with its spending reduction policy. Exports and investment should fuel a growth recovery in 2006. Exports will benefit from improved competitiveness developed by reducing production costs and benefit even more from an increase in re-export business to neighbouring
countries. The easing of fiscal policy, notably in the form of income tax reductions, will give rise to a slight recovery of private consumption at the expense of a widening deficit. With the health insurance reform, however, health spending will be accounted for under the public spending heading instead of being treated as private spending as in the past. That procedural change will cause a purely statistical 1.7 per cent decline in household consumption whereas it should grow 1 per cent on a like-to-like basis. The improved demand will cause companies to begin investing again. Although the Coface payment incident index remained below the world average in 2005, the bankruptcy rate remained high, reflecting the
MAIN ECONOMIC INDICATORS % Economic growth Consumption (var.) Investment (var.) Inflation Unemployment rate Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)
2001
2002
2003
2004
1.4 1.4 -2.7 5.1 2.5 4.3 -0.3 62.1 1.6 2.2 2.4
0.1 0.9 -7.6 3.9 2.9 3.3 -2.0 62.1 0.8 0.3 2.9
-0.1 -0.9 -4.0 2.2 3.7 2.3 -3.2 63.2 2.0 2.0 2.9
1.7 0.0 4.2 1.4 4.9 2.1 -2.1 62.3 8.5 7.8 3.3
2005(e) 2006(f ) 0.7 0.2 0.3 1.5 6.2 2.2 -1.6 63.0 4.3 3.6 5.8
2.2 -1.7 7.7 1.7 5.9 2.2 -1.8 64.0 6.1 5.6 6.8
80 e = estimate, f = forecast
THE NETHERLANDS persistent weaknesses in services to private individuals as well as in agriculture, the hotel-food service industry, and retail. In 2006, a decline in
bankruptcies should accompany the improvement in domestic economic conditions.
PAYMENT AND COLLECTION PRACTICES Payment Bills of exchange are rarely used in the Netherlands because it is not standard business practice to do so. As in Germany, they signal mistrust on the part of the supplier and so are incompatible with the climate of trust needed to maintain a stable business relationship. Cheques too are little used. They are an unreliable means of payment as they can be cashed only if covered. Consequently, issuing an uncovered cheque is not a criminal offence and those on the receiving end of a bounced cheque incur rather high bank charges. Under Dutch law, bills of exchange and cheques serve mainly to substantiate the existence of a debt. By contrast, bank transfers (Bankgiro) are by far the most common means of payment. All leading Dutch banks use the SWIFT network, which offers a cheap, flexible and quick international funds transfer service. Centralizing accounts, based on a centralized local cashing system and simplified management of fund repatriation, are also widely used.
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Debt collection The collection process begins with the debtor being served with a formal demand for the payment of principal plus accrued interest. This is followed, where necessary, by the service of a summons to pay by a bailiff or solicitor. Where the sales agreement makes no mention of the interest rate, from 1 December 2002 the rate of interest applicable is the European Central Bank’s refinancing rate, marked up by seven percentage points. The rate in force before the first day of the six-monthly period concerned applies throughout that period. In the absence of payment or an agreement, creditors may engage a local lawyer to initiate legal proceedings. The Dutch legal system allows lawyers to act as both barristers and solicitors: as solicitors they practise within the jurisdiction of their
■
registration, whereas as barristers they may plead cases before any court in the country. Before initiating legal proceedings, effective pressure can be brought to bear on a debtor by means of a winding-up petition. Such petition can succeed without much difficulty provided two conditions are met: the applicant has submitted evidence of payment default on an undisputed claim to the civil court – there are no commercial courts – and a second claim of any kind (commercial, alimony, tax debt and so on) exists. Another procedure, also reserved for undisputed claims, involves recourse to a rapid, simplified summary procedure (kort geding) in relatively widespread use. With that procedure, the parties often accept the provisional award granted by the judge as final, thereby putting an end to the dispute. The summary ruling thus obtained results in provisional execution even if the debtor lodges an appeal. Ordinary proceedings in which both parties are heard are for the most part based on written submissions, with a simplified procedure before a district court (kantongerecht) for claims under €5,000. Larger claims are heard by a court of first instance (Rechtbank), whereby both parties argue their case via written submissions. Unless the parties expressly request the right to make oral arguments, which is rarely the case, the judge bases his or her ruling on the principal case documents submitted by the parties after they have appeared in court (notably to seek an amicable settlement). For complex cases requiring special examination, the judge will follow a more formal procedure based on the examination of each litigant’s brief and counter-briefs. In such matters, the judge will carefully assess the parties’ compliance with the general terms and conditions of sale appearing on invoices and purchase orders, since they form the legal framework of the commercial contract and thus play a crucial role in the proceedings.
1
81
EUROPE AND THE CIS Finally, recourse to arbitration is common in the Netherlands. Most arbitration bodies work in specific fields and arbitrators are often selected from among specialist lawyers. Arbitral awards tend to be based on equity rather than on legal considerations.
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
250
WORLD Netherlands
200
150
100
50
Ju ne 9 D 3 ec Ju 93 ne 94 D ec Ju 94 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 9 D 7 ec Ju 97 ne 98 D ec Ju 98 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 0 D 1 ec Ju 01 ne 02 D ec Ju 02 ne 0 D 3 ec Ju 03 ne 04 D ec Ju 04 ne 0 D 5 ec -0 5
0
82
NORWAY
Norway Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
Coface analysis
4.6 250,400 54,530
1
Short-term: A1
RISK ASSESSMENT Economic activity was particularly dynamic in 2005 in a context of soaring oil revenues. The expansion of low-cost credit and a wealth effect resulting from the appreciation of property assets spurred robust household spending. Investment by companies in both the oil and non-oil sectors was also very buoyant. Conversely, traditional non-oil exports suffered from the poor economic conditions in Europe and the Norwegian krone appreciation. In 2006, a slowdown will not prevent the economy from continuing to grow at a good clip, closer, moreover, to its potential. Household consumption will continue to rise, buoyed by the steady decline of unemployment, higher wages and
largely expansionary fiscal policy, fuelled by oil revenues and tapping into funds held in reserve for future generations. With interest rates rising, nonoil productive investment and residential construction should sag. Finally, the krone appreciation will keep exports from fully capitalizing on the European recovery. Company profitability has been good, including in the sector exposed to international competition. The entire economy has benefited from the oil sector’s excellent performance as evidenced by the further decline in bankruptcies (down 14 per cent in 2005) and a good Coface payment incident index. The situation should remain favourable in 2006.
MAIN ECONOMIC INDICATORS %
2001
2002
2003
2004
Economic growth* Consumption (var.) Investment (var.)* Inflation Unemployment rate Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.)* Imports (var.) Current account balance (%GDP)
2.1 1.8 2.6 3.0 3.6 7.2 13.7 29.2 1.5 3.6 15.5
1.6 3.0 4.6 1.3 3.9 6.9 9.1 35.7 0.4 3.4 12.9
0.4 3.0 -4.9 2.5 4.5 4.1 7.6 35.2 5.1 4.3 12.9
3.4 4.4 6.1 0.5 4.5 1.8 11.4 29.0 3.0 11.0 13.8
2005(e) 2006(f ) 3.7 3.7 7.3 1.6 4.3 2.0 13.5 27.0 3.0 6.6 17.0
3.0 3.6 5.4 2.1 4.1 3.0 16.0 25.0 4.5 5.4 17.0
83
*
mainland
e = estimate, f = forecast
EUROPE AND THE CIS PAYMENT AND COLLECTION PRACTICES
84
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Norway
250
200
150
100
50
ne
D
93 ec -9 3 ne 9 D 4 ec -9 Ju 4 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 9 D 7 ec Ju 97 ne 98 D ec Ju 98 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 01 D ec Ju 01 ne 0 D 2 ec Ju 02 ne 0 D 3 ec Ju 03 ne 04 D ec Ju 04 ne 0 D 5 ec -0 5
0
Ju
Debt collection The collection process commences with the debtor being sent a demand for the payment of the principal amount, plus any contractually agreed interest penalties, within 14 days. Where an agreement contains no specific penalty clause, interest starts to accrue 30 days after the creditor serves a demand for payment and, since 1 January 2004, is calculated at the Central Bank of Norway’s (Norges Bank) base rate, in effect on 1 January and 1 July of the relevant year, increased by seven percentage points. In the absence of payment or an agreement, creditors may go before the Conciliation Board (Forliksrådet), an administrative body presided over
■
by elected, non-professional judges sitting collectivley as three members, to obtain a quick and inexpensive ruling. In this event, they must submit documents authenticating their claim, which should be denominated in Norwegian kroner (NOK). The Conciliation Board then summons the debtor at short notice to acknowledge or dispute the claim before hearing the parties, either in person or through their official representatives (stevnevitne). At this stage of proceedings, lawyers are not systematically required. The agreement thus reached will be binding, as would be a judgment. If a settlement is not forthcoming, the case is referred to the court of first instance for examination. However, for claims found to be valid, the Conciliation Board has the power to hand down a decision, which has the force of a court judgment. Where a defendant fails to respond to the arbitrator’s summons or appear at the hearing, the Board passes a ruling in default, which also has the force of a court judgment. More complex or disputed claims are heard by the court of first instance (Byret). The plenary proceedings of this court are based on oral evidence and written submissions. The court examines the arguments and hears the parties’ witnesses before delivering a verdict. Norway does not have a system of commercial courts, but the probate court (Skifteret) is also competent to hear disposals of capital assets and successions, as well as insolvency proceedings.
Ju
Payment Bills of exchange and cheques are neither widely used nor recommended, as they must meet a number of formal requirements in order to be valid. In addition, creditors frequently refuse to accept cheques as a means of payment. As a rule, both instruments serve mainly to substantiate the existence of a debt. Conversely, promissory notes (gjeldsbrev) are much more common in commercial transactions and offer superior guarantees when accompanied by an acknowledgement of debt from the buyer as, in the event of default, such an admission allows the beneficiary to obtain a writ of execution from the competent court (Namrett). Bank transfers are by far the most widely used means of payment. All leading Norwegian banks use the SWIFT network, which offers a cheap, flexible and quick international funds transfer service. Centralizing accounts, based on a centralized local cashing system and simplified management of fund transfers, are also fairly widely used. Electronic payments, involving the execution of payment orders via the website of the client’s bank, are rapidly gaining popularity.
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POLAND
Poland Population (million inhabitants) GDP (US$ million)
38.2 209,563
1
Short-term: A3
Coface analysis
Medium-term: Quite low risk
STRENGTHS ● Exports have benefited from increasing productivity gains that have partially offset the zloty appreciation’s impact. ● The country’s integration into the EU has improved its medium-term growth prospects. ● External debt ratios have remained sustainable. ● A current account deficit under control and a moderate short-term debt burden have reduced Poland’s vulnerability to a crisis of confidence.
RISK ASSESSMENT Economic growth sagged in 2005 amid domestic demand and export slowdown. Although company solvency has been generally good, competitive pressures, particularly in the distribution sector, can give rise to payment incidents. In 2006, higher real wages, an improved labour market and low interest rates should spur consumption and investment. Consolidating government finances still constitutes a challenge crucial to the country’s future admission to the euro zone. The current account deficit, meanwhile, should widen slightly in 2006 with increased investment spurring imports. That imbalance will remain limited, however, due to the good performance of services, increased
WEAKNESSES A high public sector deficit continues to hamper the country. ● Debt amortization has kept external financing needs at appreciable levels. ● A low company investment rate has impeded economic growth. ● Although declining, unemployment is still high. ● The government’s weakness could complicate matters in implementing economic policy and reforms. ●
remittances from expatriate workers and larger inflows from the EU. Debt amortization has nonetheless kept financing needs at appreciable levels. However, with the country already in a position to make partial early repayment of its debt to Paris Club creditors, it should not encounter serious difficulties in obtaining financing in the market. After its victory in the September/October 2005 legislative and presidential elections and the failure of its negotiations with the Liberal Party, the conservative Law and Justice Party formed a minority government that currently has the support, albeit shaky, of populist and ultraCatholic parties.
85
EUROPE AND THE CIS MAIN ECONOMIC INDICATORS US$ billions
2001
2002
2003
2004
2005(e) 2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Unemployment rate (%) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
1.1 5.5 -3.7 17.4 41.7 49.3 -7.7 -5.4 -2.8 37.8 25.9
1.4 1.9 -3.3 20.0 46.7 54.0 -7.2 -5.0 -2.5 42.9 17.4
3.8 0.7 -4.8 20.0 61.0 66.7 -5.7 -4.6 -2.1 49.3 20.0
5.3 3.5 -3.9 19.1 81.9 87.5 -5.6 -10.4 -4.1 50.5 19.8
3.2 2.3 -3.6 17.8 96.4 99.3 -2.9 -4.6 -1.5 40.7 20.3
4.0 1.9 -3.6 16.9 107.3 111.6 -4.3 -5.8 -1.8 39.7 11.8
4.9
5.1
4.7
3.7
3.9
3.6
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview Since 1 January 2006 the gross minimum wage is fixed at 899.10 zlotys (€226), whereas the average wage at the end of October 2005 was 2,538.88 zlotys (about €640).
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Means of entry Sweeping reforms in the laws and regulations governing market access have brought Poland closer into line with EU standards. Since EU accession on 1 May 2004, there are no customs barriers between Poland and member states of the EU. Transitional measures, however, remain in force for the pharmaceutical industry (licences) and for medical equipment and instruments.
■
Attitude towards foreign investors Drawing on the country’s clear competitive edge, the Polish government had at end-2004 managed to attract an estimated US$84.5 billion in FDI. These inflows rose in 2005, particularly in manufacturing but also in outsourcing and support service globalization. The amount of FDI entering the country this year could be as high as US$10 billion, ie close to the record levels achieved in 2000. The privatization programme, 60 per cent of whose receipts are derived from foreign investors, was relaunched in 2004–2005, with asset disposals of
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86
state-owned companies – PKO BP bank, gas supplier PGNiG – on the Warsaw stock exchange. The new PiS (conservative right) government, in power since November 2005, has nevertheless announced the suspension of privatizations of companies deemed strategic for the country’s economy. The economic freedom act of July 2004 places EU persons and companies on an equal footing with Polish nationals. It also reduces the number of concessions, permissions and registration formalities, while simplifying company incorporation procedures through, among other things, a one-stop shop that will be created in 2007. Safeguards for foreign investors have been strengthened and there are now no restrictions on the repatriation of dividends. However, the administrative apparatus remains hamstrung by lack of transparency, red tape and, in some cases, corruption. Administrative procedures remain lengthy and complex even if the government of Mr Marcinkiewicz is committed to simplifying them. Foreign exchange regulations The zloty’s exchange rate is freely determined by the market with a central peg set daily by the National Bank of Poland. The zloty has been fully convertible since 1 October 2002. Poland’s prospects of joining the euro before 2011 are remote. The European Commission observed in November that Poland is the only country not to have a fixed date for adoption of the single currency.
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POLAND PAYMENT AND COLLECTION PRACTICES
1
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Poland
250
200
150
100
50
5 -0 ec D
4
05
-0 ec D
Ju ne
03
04
ec D
Ju ne
02
03
ec D
Ju ne
1
02
-0 ec D
Ju ne
0
01
-0 ec D
Ju ne
9
00
-9 ec
ne
D
Ju
ec
ne
-9
99
8
0
D
Debt collection It is advisable, as far as possible, not to initiate recovery proceedings locally due not only to the cumbersome formalities and the high cost of legal action, but also to the country’s lengthy court procedures: it takes almost two years to obtain a writ of execution due to the lack of judges adequately trained in the rules of the market economy and proper equipment. Serving a demand for payment, properly accompanied by proof of debt, reminds the debtor
■
of his or her obligation to pay the outstanding sum, plus any accrued interest. The term of limitation for receivables arising from a merchandise sales contract and the ensuing past-due interest is only two years. From 1 January 2004 interest may be claimed as of the 31st day following delivery of the product or service, even where the parties have agreed to a longer payment time. The legal interest rate will apply from the 31st day until the contractual payment date. Thereafter, in the case of late payment, the higher tax penalty rate will apply and it will very often be higher than the legal interest rate, unless the contracting parties have agreed on a higher late interest rate. It is advisable to seek an amicable settlement based on a payment schedule drawn up by a public notary, which includes an enforcement clause that allows creditors, in the event of default by the debtor, to go directly to the enforcement stage, subject to acknowledgement by the court of the binding nature of this document. Creditors may seek an injunction to pay (nakaz zaplaty) via a fast-track and less expensive procedure, provided they produce positive proof of debt (like bills of exchange, cheques or unpaid weksels in blanco, or else acknowledgements of debt). If the judge is not convinced of the substance of the claim – a decision he or she alone is empowered to make – he or she may refer the case to full trial. Ordinary proceedings are partly in writing, with the parties filing submissions accompanied by all supporting case documents (original or certified copies), and partly oral with the litigants, their
Ju
Payment Bills of exchange and cheques are not widely used, as they must meet a number of formal issuing requirements in order to be valid. Nevertheless, for dishonoured and protested bills and cheques, creditors may resort to a fast-track procedure resulting in an injunction to pay. Until now, cash payments were commonly used in Poland by individuals and firms alike, but under the Freedom of Business Activity Act (Ustawa o swobodzie dzialalno¥ci gospodarczej) of 2 July 2004, which came into force on 21 August 2004, companies are required to make settlements via a bank account for transactions exceeding the equivalent in zlotys of €15,000. This measure aims to counter fraudulent money laundering. One highly original instrument is the weksel in blanco, an incomplete promissory note bearing only the term ‘weksel’ and the issuer’s signature at the time of issue. The signature constitutes an irrevocable promise to pay and this undertaking is enforceable upon completion of the promissory note (amount, place and date of payment) in accordance with a prior agreement between issuer and beneficiary. Weksels in blanco are widely used, as they also constitute a guarantee of payment in commercial agreements and the rescheduling of payments. Bank transfers are by far the most widely used means of payment. Leading Polish banks – after an initial phase of privatization and a second phase of concentration – use the SWIFT network, which offers a cheap, flexible and quick domestic and international funds transfer service.
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87
EUROPE AND THE CIS lawyers and their witnesses heard on the main hearing date. At such legal proceedings, the judge is required, as far as possible, to attempt conciliation between the parties.
Commercial disputes are generally heard by the commercial courts (sad gospodarczy), falling under the jurisdiction of either district courts or regional courts (Voïvodies) depending on the size of the claim.
OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 56 ■ Public consumption 13 ■ Investment 15
Exports: 21% of GDP
Imports: 26% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
20000
20000
15000
15000
10000
10000
5000
5000
0
0 Germany France
Italy
UK Netherlands
Germany
Italy
Russia
France
China
IMPORTS by products ■ All food items 5% ■ Fuels 9% ■ Chemical products 14% ■ Other manufactured goods 28% ■ Capital goods and transport equipment 38% ■ Miscellaneous 6%
EXPORTS by products ■ All food items 8% ■ Chemical products 6% ■ Other manufactured goods 38% ■ Capital goods and transport equipment 37% ■ Miscellaneous 11%
STANDARD OF LIVING / PURCHASING POWER
88
Indicators
Poland
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1,000 inhabitants Number of computers per 1,000 inhabitants
11,210 5,280 0.858 26.7 63 17.6 319 142
Regional average DC average 7,530 2,580 0.806 30 64 20 228 73.4
4,300 1,280 0.697 33 43 31 112 28.4
PORTUGAL
Portugal Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
Coface analysis
10.5 175,200 16,671
1
Short-term: A2
RISK ASSESSMENT 2005 was a year marked by economic stagnation and an exacerbated general government deficit. The contribution of foreign trade to growth was negative. Sluggish external demand and a loss of market share hampered exports, whereas imports were boosted by vigorous consumer spending up until the VAT rise came into force in July 2005. Growth recovery will be moderate in 2006. The acceleration of European demand will fuel an upturn in exports, even though insufficient transition to higher value-added products and weak productivity will lead some companies to relocate their production to new member countries. Consumer spending will cool down due to high level of household debt and stronger pressure from both direct (tax surcharge on higher incomes) and indirect taxation. In this context,
investment will pick up moderately. The government will carry out corrective measures aimed at reducing general government deficit. In parallel, the privatization programme will be accelerated, in particular in the energy (Galp Energia, REN, EDP) and paper sectors (Portucel et Inapal). In addition to a breakthrough in terms of reforms, privatization will permit a recovery in public finances. The company situation has only improved slightly under the combined effect of both export and investment recovery. However, in the more competitive environment caused by the enlargement of the EU and expiration of the Multifibre Arrangement, risks have persisted in sectors such as textiles, clothing and car-industry subcontracting. In addition, the paper sector is suffering from accrued competition from Nordic countries and Brazil.
MAIN ECONOMIC INDICATORS % Economic growth Consumption (var.) Investment (var.) Inflation Unemployment rate Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)
2001
2002
2003
2004
2.0 1.2 0.8 4.3 4.0 4.3 -4.4 62.5 2.1 1.1 -9.5
0.4 1.0 -4.9 3.6 5.0 3.3 -2.7 65.1 1.5 -0.3 -6.7
-1.2 -0.5 -9.8 3.3 6.3 2.3 -2.8 66.6 4.5 -0.9 -5.1
1.3 2.3 0.6 2.5 6.7 2.1 -3.0 69.5 4.6 6.4 -7.5
2005(e) 2006(f ) 0.8 1.9 -0.6 2.3 7.4 2.1 -6.0 74.0 1.6 6.3 -6.5
1.2 1.3 2.8 2.5 7.7 2.0 -4.5 77.0 4.4 2.3 -5.8
89 e = estimate, f = forecast
EUROPE AND THE CIS PAYMENT AND COLLECTION PRACTICES Payment Bills of exchange are widely used for commercial transactions in Portugal. In order to be valid, however, they are subject to stamp duty whose rate is set each year in the country’s budget. The current rate of stamp duty is 0.5 per cent of the amount of the bill, or a minimum of €1. A bill of exchange is generally deemed independent of the contract to which it relates. While creditors, in the event of payment default, are not required to issue a protest notice before bringing an action to court, such a notice can be used to publicize payment default and pressure the debtor to honour his or her obligations, albeit belatedly. Cheques too are widely used. They are payable on presentation and subject to the minimum stamp duty that is borne by the bank. It is no longer an offence to issue uncovered cheques as a guarantee for staggered payments. In the event of default, cheques, bills of exchange and promissory notes offer effective guarantees to creditors as they are enforceable instruments in law and entitle holders to initiate executory proceedings. Under this process, creditors may petition the court to issue a writ of execution and notify the debtor of such an order. Where the debtor still fails to pay up, creditors may request the court to issue an attachment order against the debtor’s property. Flexible and efficient bank transfers via the SWIFT electronic network, for which large Portuguese banks are equipped, are also used for a growing number of payments.
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refinancing rate marked up by seven percentage points. Since 1 October 2004, the interest rate set henceforth by decree of the Treasury Department will be published in Diário da República during the first fortnight of January and July each year, and be applicable for the six coming months. The fast-track procedure (injunction to pay: injunção) applicable to commercial claims considered uncontested – and, since 19 March 2003, whatever the amount involved – is heard by the court in whose jurisdiction the obligation is enforceable. For disputed claims, creditors may initiate formal and costly declarative proceedings (acção declarativa), lasting a year or more, to obtain a ruling establishing their right to payment. They must then initiate enforcement proceedings (acção executiva) to enforce the court’s ruling. Under the revised Code of Civil Procedure introduced in January 1996, any original deed established by private seal (ie any written document issued to a supplier) in which the buyer unequivocally acknowledges his or her debt is henceforth deemed an instrument enforceable by law. This provision aims to encourage buyers to comply with contractual undertakings and offers creditors a safeguard against protracted legal action. As Portugal does not have commercial courts (other than those in Lisbon and Oporto, which deal with insolvency proceedings, dissolution of companies and protection of industrial property), civil courts (varas cíveis), presided over by a collegial panel of three judges, hear large commercial claims exceeding €14,963.94. PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
90
250
WORLD Portugal
200
150
100
50
0
Ju ne 9 D 3 ec Ju 93 ne 94 D ec Ju 94 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 9 D 7 ec Ju 97 ne 98 D ec Ju 98 ne 9 D 9 ec -9 Ju 9 ne 0 D 0 ec Ju 00 ne 0 D 1 ec Ju 01 ne 02 D ec Ju 02 ne 0 D 3 ec -0 Ju 3 ne 04 D ec Ju 04 ne 0 D 5 ec -0 5
Debt collection Out-of-court collection starts with the debtor being sent a final demand for the payment of the principal amount, plus any default interest that may have been agreed between the parties, within eight days. Except when stipulated otherwise in the commercial agreement, the rate of interest applicable is the European Central Bank’s
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ROMANIA
Romania Population (million inhabitants) GDP (US$ million)
21.7 56,951
1
Short-term: A4
Coface analysis
Medium-term: Moderately high risk
STRENGTHS ● The country’s future admission to the EU has improved its economic outlook. ● Romania boasts an appreciable domestic market. ● The workforce is skilled and wages not very high. ● Public sector and foreign debt has been at reasonable levels amid increasing FDI inflows and ample foreign exchange reserves.
RISK ASSESSMENT Economic growth slowed in 2005 due to the floods that affected farm production, resulted in slower export growth and increased demand for imported goods, which should also hamper growth in 2006. Although company payment behaviour is still subject to frequent delays, they often give rise to collections. Inflation has remained relatively high despite the exchange rate appreciation. External accounts have deteriorated amid buoyant domestic demand, increased oil costs and a slowdown of sales abroad, which have been suffering from a loss of competitiveness and competition from Chinese textiles.
WEAKNESSES A lack of discipline on fiscal, monetary and wage policies has drawn sharp criticism from the IMF. ● Macroeconomic imbalances have been increasing, particularly in external accounts. ● Continued strong growth, financial market confidence and EU accession in 2007 will all be subject to continued effort on reforms. ●
Capital inflows, in the form of direct investments and loans from foreign commercial banks to their local subsidiaries, have increased, causing a marked increase in foreign exchange reserves. Although growing, foreign debt has remained at sustainable levels. Dissension within the centrist government coalition has hampered the pursuit of economic policy and progress on reforms. Relations with the IMF have become strained. The progress made on the legal system and the policy on competition has been encouraging. However, the country still has much ground to make up, notably on strengthening civil service capabilities and combating corruption, which could delay admission to the EU for a year.
91
EUROPE AND THE CIS MAIN ECONOMIC INDICATORS 2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP)(*) Unemployment rate (%) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
5.7 34.5 -8.0 8.6 11.4 14.4 -3.0 -2.2 -5.5 34.6 16.9
5.0 22.5 -5.1 8.1 13.9 16.5 -2.6 -1.5 -3.3 37.7 15.8
5.2 15.3 -5.3 7.2 17.6 22.2 -4.5 -3.3 -5.8 39.2 15.5
8.3 11.9 -2.8 6.2 23.5 30.2 -6.7 -5.6 -7.6 39.5 12.5
4.6 8.8 -1.9 6.5 28.4 38.7 -10.2 -8.5 -8.6 37.6 10.5
4.4 7.1 -2.3 7.2 30.9 43.3 -12.4 -11.2 -9.8 42.4 12.7
2.7
3.7
3.7
4.4
5.4
5.8
*general government deficit + public energy-sector losses
CONDITIONS OF ACCESS TO THE MARKET Market overview In December 2004, Romania successfully concluded EU accession talks that had begun in 2000. It nevertheless saw itself being subjected to safeguard clauses concerning sensitive chapters of the talks (justice system and internal affairs, competition) capable, in the event of exercise by the Commission, of delaying accession by one year. On 25 April 2005 Romania signed its Accession Treaty in Luxembourg, setting 1 January 2007 as the likely date for accession. The Commission’s last progress report, dated 25 October 2005, was better than previous ones as tangible progress had been observed in matters of competition and, to a lesser extent, justice. All the same, the Commission issued stern warnings about incomplete reforms, giving Romania several yellow cards in respect of its anticorruption drive, border security and controls and industrial pollution record. It has been summoned to act upon these complaints before the progress report of April 2006, which will de facto determine whether accession actually takes place on 1 January 2007.
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Means of entry Romania is firmly engaged in tariff dismantling. Firstly in connection with WTO accession, then in
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92
2005(e) 2006(f )
US$ billions
e = estimate, f = forecast
relation to the association agreement with the EU in 1995 pending full EU integration on 1 January 2007. At the multilateral level, it has undertaken not to exceed certain custom tariff rates and accepted most of the commitments in favour of liberalization of trade, services and market access for service providers in the country. In the context of EU trade, goods are traded freely, with import–export licences required for only some goods (farm products, used equipment). Import quotas for farm products (especially wines and alcoholic beverages) remain, but are gradually being reduced. Industrial products are exempt from customs duties upon presentation of a EUR1 certificate. VAT of 19 per cent is still payable on the FOB destination value. Excise duties on petroleum products, alcoholic beverages and cigarettes have recently been lifted. The use of traditional means of payment (bank transfers, documentary credit, documents against payment, promissory notes, bills of exchange) is spreading and SWIFT transfers are quickly becoming the preferred instrument in import settlements. In the microeconomic commercial sector, bank cards and various types of credit facility (consumer, mortgages, leasing) are more widely used.
ROMANIA Attitude towards foreign investors From the very outset of its economic transition, Romania has been fundamentally open to foreign investment. To make itself more attractive, on 1 January 2005 it introduced 16 per cent flat-rate corporation tax (previously 25 per cent). The legal system for foreign investment is mainly governed by the law of July 2001, which reaffirms equal treatment for all investments. Accordingly, the Romanian government has put in place a system of government incentives for direct investment having a significant impact on the economy, particularly if it exceeds €1 million. These include, until 31 December 2006, exemption from customs duties on new imported goods required in connection with the investment, a 20 per cent tax rebate on the value of the investment and accelerated depreciation for investments, except those involving buildings.
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In addition, local authorities grant specific assistance to big regional investments (release of land, employment support, simplification of administrative formalities). However, the relationship between companies and government departments remains fairly troublesome. Widespread corruption, especially in the administrative service, remains a serious problem. While the overall business environment has improved slightly it is still dependent on an unstable, often imprecise, indeed incoherent, judicial system (eg new Chemists bill).
1
Foreign exchange regulations The RON is a floating currency with an inflation target. The ron:euro and ron:dollar exchange rate rose sharply in 2004–2005 on the back of a massive influx of capital drawn by the liberalization of capital accounts in April 2005. Non-residents can now open and draw on RON accounts.
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PAYMENT AND COLLECTION PRACTICES Payment Bills of exchange and especially promissory notes are the payment methods most commonly used for domestic, and sometimes international, transactions. In case of non-payment, once the court recognizes a promissory note’s validity, it constitutes an enforcement order permitting the beneficiary to proceed with immediate forced execution (executie silita) against the debtor. The use of cheques is also relatively commonplace, especially locally. Cheques allow creditors to exert substantial pressure on debtors since an unpaid cheque not only gives access to forced execution, but also constitutes a criminal offence with the offender liable to a proportional fine, or even a prison sentence of six months to a year. That is why articles of association often stipulate that only company managers have the authority to issue cheques. Bank transfers are becoming the most common payment method with the main Romanian banks – after an initial privatization phase and a subsequent concentration phase – now linked to the SWIFT electronic network, which provides low-cost, flexible and rapid processing of domestic and international payments.
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Debt collection It is advisable, as far as possible, to avoid taking legal action locally due not only to the formalism and high cost of legal procedures but also to the lengthy court proceedings: it takes almost three years to obtain an enforcement order because of a lack of judges with adequate training in market economy practices and proper equipment. Formal notice to pay served on the debtor, accompanied by documents supporting the claim, remind him or her of the payment obligations, increased by past-due interest. Since January 2000, in international trade relationships the annual past-due interest rate has been set at 6 per cent unless agreed otherwise by the parties and provided Romanian law applies to the contract. As stipulated in the civil procedure code, any legal action based on a liquid commercial claim must be preceded by an attempt at conciliation between the parties within 30 days of the creditor’s summons. In that regard, it is advisable to give preference to out-of-court-settlement, based on a rescheduling plan for the arrears prepared by the creditor’s legal counsel or established in preference as a notarial
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93
EUROPE AND THE CIS deed, which will make it possible to obtain an enforcement order against the debtor more quickly, in case of failure to comply with the agreement. With positive proof of debt certain and undisputed (eg acknowledgement of debt, promissory note, unpaid cheque), the creditor can have recourse, since July 2001, to an injunction to pay (somatie de plata), a summary procedure that allows the judge – if he or she considers the petition justified – to issue a writ ordering the debtor to pay the principal and legal costs within 30 days of notification of the ruling. Conversely, if the creditor’s petition is dismissed by the court, the judge’s decision is irrevocable and the only
94
remaining recourse would then be to initiate an ordinary procedure. Similarly, in case of objection by the debtor, the case is treated as a dispute subject to an ordinary procedure. Ordinary proceedings are partly in writing with the parties or their lawyers, filing submissions accompanied necessarily by all supporting case documents (original or certified copies), and partly oral with the litigants and their witnesses, who are heard on the main hearing date. Commercial disputes are heard by either local courts (judecatoria) or regional courts (tribunalul), acting as a commercial section, depending on the size of the claim involved.
ROMANIA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 55 ■ Public consumption 6 ■ Investment 15
1
Exports: 33% of GDP
Imports: 39% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
5000
5000
4000
4000
3000
3000
2000
2000
1000
1000
0
0 Italy
Germany France
UK
Turkey
Italy
Germany Russia
France
Turkey
IMPORTS by products ■ All food items 7% ■ Fuels 11% ■ Chemical products 10% ■ Other manufactured goods 39% ■ Capital goods and transport equipment 29% ■ Miscellaneous 4%
EXPORTS by products ■ Fuels 6% ■ Chemical products 5% ■ Other manufactured goods 56% ■ Capital goods and transport equipment 22% ■ Miscellaneous 11%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1,000 inhabitants Number of computers per 1,000 inhabitants
Romania 7,140 2,260 0.792 26.1 56 16.7 199 96.6
Regional average DC average 7,530 2,580 0.806 30 64 20 228 73.4
4,300 1,280 0.697 33 43 31 112 28.4
95
EUROPE AND THE CIS
Russia Population (million inhabitants) GDP (US$ million)
143.4 432,855
Short-term: B
Coface analysis
Medium-term: Moderately high risk
STRENGTHS ● Russia boasts many natural resources and a diversified industrial sector. ● Tax reform has been a crucial factor in the state financial recovery. ● The country’s regional power status has strengthened since Vladimir Putin took office. ● Putin’s 2004 re-election and the federal government’s reassertion of authority over the federation, parliament and the oligarchies have brought political stability unprecedented in post-communist Russia.
RISK ASSESSMENT Economic growth has been slowing despite high oil prices. The instability of property rights, as evidenced by the ceaseless struggles over ownership of industrial flagships, has been a drag on economic activity. Oil sector expansion has slowed markedly. The industry has, moreover, lacked competitiveness due partly to real appreciation of the rouble. The government’s financial situation has continued to improve with public sector surpluses reaching record levels thanks to oil prices. The government has been gradually reducing its debt. Russian companies, meanwhile, with their solvency and payment behaviour improving sharply, have made a spectacular return to international capital markets. However, credit risk
96
WEAKNESSES The industrial sector has not been very competitive in the absence of a real opening to foreign investment. ● The government’s intention to exercise increasing control over the energy sector could jeopardize productivity. ● Institutions intended to stabilize the business climate have been struggling to assert their authority. ● Substantial destabilization risks have persisted in Northern Caucasus. ●
is still far from negligible, more for political than financial reasons however, as evidenced by the Yukos affair. The financial transparency of companies and shareholder rights still leave much to be desired. Governance has remained the country’s main weakness. Although the government has undertaken legislative renovation, its application has remained limited, particularly as regards corruption and the functioning of the legal system. Risks have remained very high in the banking sector, vulnerable to an economic downturn and a loss of confidence by depositors, despite the step forward that the deposit insurance law represents. In the political arena, although the country is now very stable, the increasing centralization of power could make the pursuit of reforms ineffective.
RUSSIA MAIN ECONOMIC INDICATORS 2005(f ) 2006(f )
US$ billions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
5.1 19.0 3.0 86.5 40.7 45.8 30.0 9.8 42.3 19.9
4.7 15.1 1.0 107.2 61.0 46.2 30.9 9.0 44.1 16.8
7.3 12.0 2.0 135.9 76.0 59.8 35.4 8.2 43.1 13.6
7.2 11.7 4.0 183.5 96.0 87.2 59.9 10.3 37.0 12.4
5.7 11.5 8.0 248.8 127.0 121.4 91.7 11.8 28.9 15.6
5.3 10.0 7.0 271.7 147.0 124.7 92.2 10.2 28.1 14.4
5.7
6.4
7.8
10.2
12.1
15.3
1
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview Some of the reforms undertaken during Vladimir Putin’s first term in the fields of customs organization, taxation, land ownership and public administration have yielded results and helped bring Russia into line with international standards and practices. Only their continued and proper implementation will improve the business climate and boost foreign investor confidence.
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Means of entry Since 1 January 2001, Russia has carried out a series of customs reforms involving the lowering and unification of tariff rates. Together with the introduction of a new customs code (1 January 2004) these have been designed to facilitate trade and reduce customs clearance times. These changes should, in principle, help simplify customs clearance procedures, which remain complex to this day.
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Attitude towards foreign investors The last six years have seen wide-ranging reforms aimed at relaxing rules, easing taxation and facilitating start-ups. Tax reform, the major achievement of the 2000–2001 period, has helped create a more favourable environment for foreign investors. It has resulted in across-the-board tax
■
cuts, with more on the way. Corporation tax has been lowered and capped at 24 per cent, income tax cut to 13 per cent, motorway toll tax and sales tax abolished, VAT reduced from 20 per cent to 18 per cent and the marginal rate of unified welfare tax slashed from 35.6 per cent to 26 per cent. Administrative reforms designed to reduce the state’s economic role have made progress in terms of legislation (simplification of company registration and licence award procedures), but are still in their early stages. Growing awareness of the usefulness of protecting intellectual property rights has resulted in legislation being given more teeth (amendments to the Copyright and Related Rights Act, dated July 2004). However, only proper enforcement will help combat the alarming degree of infringement. The law of 22 July 2005 could help attract foreign investors as it provides for the setting up of special economic zones. It aims to create a unified framework for these zones, until now under the jurisdiction of the regions. Two tax- and dutyexempt zones are to be established – one for manufacturing, the other for technology development. In practice, however, it is not uncommon for investors to encounter difficulties arising from ineffective law enforcement and excessive red tape. For example, the tax authorities can apply the Tax Act in a manner that penalizes foreign firms (refusal of
97
EUROPE AND THE CIS previously acquired benefits, lengthy and biased tax inspections). The Yukos affair, moreover, has cast doubt over the government’s privatization and energy policy as well as its ability to apply the law uniformly.
Foreign exchange regulations Under a law in force since June 2004, the requirement to convert earnings into roubles will be gradually lifted and all exchange controls abolished by 2007.
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OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 44 ■ Public consumption 13 ■ Investment 17
Exports: 32% of GDP
Imports: 21% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
12000
8000 7000 6000 5000 4000 3000 2000 1000 0
10000 8000 6000 4000 2000 0 Germany Netherlands Italy
China
Belarus
Germany Belarus Ukraine
China
USA
IMPORTS by products ■ All food items 19% ■ Chemical products 12% ■ Other manufactured goods 21% ■ Capital goods and transport equipment 32% ■ Miscellaneous 16%
EXPORTS by products ■ Fuels 53% ■ Ores and metals 7% ■ Other manufactured goods 10% ■ Capital goods and transport equipment 7% ■ Miscellaneous 23%
STANDARD OF LIVING / PURCHASING POWER
98
Indicators
Russia
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1,000 inhabitants Number of computers per 1,000 inhabitants
8,950 2,610 0.795 36 73 16.3 242 88.7
Regional average DC average 7,530 2,580 0.806 30 64 20 228 73.4
4,300 1,280 0.697 33 43 31 112 28.4
SERBIA AND MONTENEGRO
Serbia and Montenegro Population (million inhabitants) GDP (US$ million)
1
8.1 20,729
Short-term: C
Coface analysis
Medium-term: Very high risk
STRENGTHS ● After a decade of disinvestment and conflicts, the political normalization process and the reforms undertaken since October 2000 have permitted the country to win international financial community support and consolidate its economic and financial situation. ● Foreign debt restructuring has improved the country’s solvency. ● The workforce is skilled and low cost.
RISK ASSESSMENT Although economic growth has slowed due to the tightening of fiscal and monetary policy and moderation of farm production after an exceptional harvest in 2004, it has remained relatively robust. In 2006, it should be buoyed by investments made by newly privatized companies, the development of services, consumption and a slight improvement in foreign demand. Sovereign risk has eased thanks to improved fiscal performance and the ongoing foreign-debt restructuring process. Major imbalances have nonetheless persisted. Inflation has reappeared and external accounts are still in a deteriorated state despite a reduced trade deficit, attributable mainly to
WEAKNESSES The restructuring of the productive apparatus has not gone far enough; the state-owned company share in the economy is still excessive. ● The low productivity and the lack of competitiveness of state-owned companies, in conjunction with surging domestic demand, have caused the current account deficit to widen. ● The government has a parliamentary minority and is divided amid a deteriorated social situation, persistent challenges to the country’s territorial integrity and continued risk of drift toward nationalism. ●
a slowdown of imports. Those weaknesses largely derive from the still excessive share in the economy of state-owned companies lacking in financial discipline, productivity and competitiveness. The business environment has improved, however, and foreign investors have been demonstrating renewed interest in the country. The political situation has been shaky even if the government has strengthened its position by engaging in negotiations with the EU on a stabilzsation and association agreement. Challenges to the country’s territorial integrity have persisted as has the risk of early elections and the coming into power of populist and ultranationalist parties.
99
EUROPE AND THE CIS MAIN ECONOMIC INDICATORS US$ millions Economic growth (%) Inflation (%) Public sector balance (%GDP) Unemployment rate (%) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2003 2004(e)
2005(f )
2001
2002
5.5 91.0 -1.4 12.2 2,003 4,837 -2,834 -528 -4.6 103.2 2.1
4.0 21.3 -4.5 13.3 2,412 6,320 -3,908 -1,383 -8.9 76.2 3.0
2.1 11.2 -3.3 14.6 3,054 7,941 -4,887 -2,005 -9.7 69.2 6.1
8.0 9.8 -0.3 18.5 4,219 11,653 -7,434 -3,148 -13.1 62.0 9.1
5.0 15.9 1.2 n/a 5,485 11,245 -5,760 -1,997 -7.8 59.3 13.9
5.0 13.6 1.9 n/a 6,472 12,257 -5,785 -2,006 -7.5 58.4 12.7
2.5
3.7
4.5
3.7
4.6
4.5
e = estimate, f = forecast
100
SERBIA AND MONTENEGRO OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 59 ■ Public consumption 13 ■ Investment 12
1
Exports: 22% of GDP
Imports: 45% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
600
1200
500
1000
400
800
300
600
200
400
100
200
0
0 Italy
Germany Austria
France
Germany
Greece
Italy
Austria Slovenia Hungary
IMPORTS by products ■ All food items 11% ■ Fuels 17% ■ Chemical products 13% ■ Other manufactured goods 28% ■ Capital goods and transport equipment 26% ■ Miscellaneous 5%
EXPORTS by products ■ All food items 23% ■ Ores and metals 12% ■ Chemical products 7% ■ Other manufactured goods 39% ■ Capital goods and transport equipment 11% ■ Miscellaneous 7%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1,000 inhabitants Number of computers per 1,000 inhabitants
Serbia Regional average DC average & Montenegro n/a 1,910 n/a n/a 52 19.6 243 27.1
7,530 2,580 0.806 30 64 20 228 73.4
4,300 1,280 0.697 33 43 31 112 28.4
101
EUROPE AND THE CIS
Slovakia Population (million inhabitants) GDP (US$ million)
5.4 32,519
Short-term: A3
Coface analysis
Medium-term: Low risk
STRENGTHS ● A series of deep reforms has allowed the country to enhance its attractiveness to investors and accelerate economic growth. ● Integration into the EU has bolstered Slovakia’s economic and financial situation and it should be the first large Central European country to join the euro zone. ● It has ample foreign exchange reserves.
RISK ASSESSMENT Economic growth has remained robust, fuelled in particular by company investment in the exportoriented manufacturing sector. That good performance is the result of disciplined economic policy, vast reform of taxation and the social safety net, and liberalization of the regulatory framework. In that context, company solvency has been generally good with the Coface payment incident index remaining below the world average. In view of the favourable trends on inflation and public finances, Slovakia should meet the Maastricht criteria by 2007 and join the euro zone by 2009.
The current account deficit widened in 2005 amid increasing imports (spurred by dynamic domestic demand and technology purchases linked to installation of new automobile factories) and rising repatriations of profit by foreign companies. However FDI, which has covered a substantial portion of financing needs, will spur exports in 2006. Meanwhile, an influx of speculative capital has triggered rapid growth of short-term foreign debt. Weakened by scandals, the reformist, centreright minority coalition has very little chance of winning the next elections. These are scheduled, in principle, for September 2006; the left-wing Smer party is favoured.
CONDITIONS OF ACCESS TO THE MARKET
disparities. Despite substantial wage increases in the past few years, the average monthly wage is only about €420. Following completion of banking reforms and partial privatization of the gas and electricity supply
Market overview The job situation in the country remains alarming with high unemployment and wide regional
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102
WEAKNESSES The economy’s dependence on the car industry has been increasing. ● The exchange rate appreciation could undermine competitiveness. ● Short-term debt has been growing with foreign debt remaining at appreciable levels in relation to GDP. ● Unemployment has remained high and the pace of reforms could slow down in the wake of the September 2006 legislative elections. ●
SLOVAKIA MAIN ECONOMIC INDICATORS US$ millions Economic growth (%) Inflation (%) Public sector balance (%GDP) Unemployment rate (%) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2001
2002
3.8 7.1 -6.6 19.2 12,629 14,764 -2,135 -1,756 -8.4 55.0 14.4
4.6 3.3 -7.8 18.5 14,368 16,500 -2,132 -1,939 -8.0 55.3 12.4
2.9
5.4
2003
2005(e) 2006(f )
2004
4.5 5.5 8.6 7.5 -3.8 -3.1 17.5 17.3 21,838 27,752 22,479 29,208 -641 -1,456 -277 -1,447 -0.8 -3.5 55.4 57.6 13.7 8.1 5.3
5.2 2.8 -4.1 n/a 32,392 34,482 -2,090 -2,881 -6.0 54.3 6.6
5.6 2.5 -3.0 n/a 37,542 39,255 -1,713 -2,461 -4.2 48.9 5.8
5.2
5.3
5.1
1
e = estimate, f = forecast
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Slovakia
250
200
150
100
■
50
05
04
ec D
Ju ne
D
ec
04
-0 4
-0 3 ec
ne
D
Ju
02
03
ec -
ne
D
Ju
01
02
ec D
ne Ju
Ju ne
0
01
00
-0 ec
ne
D
Ju
99
-9 9 ec
ne
D
Ju
98
ec D
Ju ne
97 ne Ju
-9 8
0
-9 7
Attitude towards foreign investors Slovakia’s resolutely liberal legislation permits investors to wholly own a local company, with a 34 per cent stake constituting a blocking minority. The
Foreign exchange regulations The Slovak crown, which enjoys fairly stable parity with the euro, is freely convertible but rarely traded abroad. Since the abolition of exchange controls and the introduction of a new banking law, the trend is towards greater simplification of foreign commercial transactions.
■
ec
Means of entry Duty-free entry for industrial products is now the norm and the exceptional arrangements in respect of agricultural products have been abolished. The Slovak customs code has adopted in full the European harmonized code, the common external tariff applicable to non-EU countries and the procedures (declaration of traded goods) in respect of intra-EU trade. The most widely used means of payment are SWIFT transfers and documentary credit. Disputes and litigation are relatively rare.
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law establishes equality of treatment between Slovak and foreign investors. The Slovak investment and trade development agency, SARIO, is more proactive than before in the development of the country’s industrial areas. The new government has just lifted restrictions on foreign shareholdings in the so-called strategic sectors (energy etc), which will help boost FDI in the country.
D
companies, the ongoing privatization of the Slovak electricity utility (SE), the district heating network and the rail freight entity marks the last stage in the liberalization of Slovakia’s economy. The expanding consumer goods market clearly provides many business opportunities, with capital goods supply and industrial cooperation projects offering the best growth prospects. The latter can take the form of subcontracting, manufacturing under licence or locally-based joint ventures.
103
EUROPE AND THE CIS OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 31 ■ Public consumption 12 ■ Investment 14
Exports: 78% of GDP
Imports: 80% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
8000 7000 6000 5000 4000 3000 2000 1000 0
6000 5000 4000 3000 2000 1000 0 Germany
Czech Austria Republic
Italy
Poland
Germany
Czech Russia Republic
Austria
Italy
IMPORTS by products ■ All food items 5% ■ Fuels 12% ■ Chemical products 10% ■ Other manufactured goods 28% ■ Capital goods and transport equipment 41% ■ Miscellaneous 5%
EXPORTS by products ■ Fuels 5% ■ Chemical products 5% ■ Other manufactured goods 35% ■ Capital goods and transport equipment 47% ■ Miscellaneous 7%
STANDARD OF LIVING / PURCHASING POWER
104
Indicators
Slovakia
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1,000 inhabitants Number of computers per 1,000 inhabitants
13,440 4,940 0.849 20.9 58 18.2 241 180.4
Regional average DC average 7,530 2,580 0.806 30 64 20 228 73.4
4,300 1,280 0.697 33 43 31 112 28.4
SLOVENIA
Slovenia Population (million inhabitants) GDP (US$ million)
2.0 27,749
1
Short-term: A2
Coface analysis
Medium-term: Low risk
STRENGTHS ● The country has been enjoying regular growth and its admission to the EU has enhanced its medium-term economic outlook. ● With a web of solid ties to Western companies, Slovenia boasts the highest level of wealth in Central Europe. ● Public sector finances and external accounts have been only slightly in deficit.
RISK ASSESSMENT Economic activity sagged slightly in 2005 amid an investment and public consumption slowdown. Private consumption, which will benefit from higher real wages, and exports should spur growth in 2006. There has been a slight external account imbalance. Export revenues should continue to benefit from firm sales of vehicles and services. Although FDI inflows should increase thanks to privatizations, they have nonetheless been covering a relatively limited proportion of financing needs. Foreign debt, particularly bank debt, has been increasing. Short-term liabilities have nonetheless been under control with debt service remaining
WEAKNESSES Small and very open, the economy has been very dependent on international economic conditions. ● The country has been carrying relatively high foreign debt in relation to GDP. ● Reforms need to be taken further (downsizing government, enhancing labour market flexibility). ●
sustainable and foreign exchange reserves still comfortable. The country should be able to adopt the euro in January 2007. The exchange rate stability since the country joined the European exchange-rate mechanism (ERM2) in June 2004 has strengthened the disinflation process, with Slovenia meeting the other Maastricht criteria. The centre-right coalition should continue to dominate the political scene. However, its reform programme, intended to downsize the government and increase certain taxes, has drawn protests from unions and some segments of the opposition.
105
EUROPE AND THE CIS MAIN ECONOMIC INDICATORS US$ millions Economic growth (%) Inflation (%) Public sector balance (%GDP) Unemployment rate (%) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2005(f ) 2006(f )
2001
2002
2003
2004
2.7 8.4 -1.3 6.4 9,343 9,962 -620 31 0.2 47.5 8.7
3.5 7.5 -1.5 6.3 10,471 10,723 -252 325 1.5 48.7 9.9
2.7 5.6 -1.4 6.7 12,913 13,538 -625 -99 -0.4 54.1 13.4
4.2 3.6 -1.4 6.4 15,818 16,862 -1,044 -275 -0.9 59.4 15.4
3.9 2.5 -1.3 6.2 18,645 19,675 -1,030 -105 -0.3 61.2 16.3
4.0 2.5 -1.0 6.0 21,150 22,288 -1,138 -167 -0.4 64.0 14.6
4.4
6.4
6.2
5.2
4.4
4.0
e = estimate, f = forecast
entire company must be filed if the acquirer seeks to buy more than 25 per cent of a company’s voting rights. The opening of the market to foreign investors is subject to one exception: armaments companies. Foreign investors are welcomed and assisted by the government more for greenfield investments than for the acquisition of Slovenian companies because of public misgivings about such acquisitions. The centre-right government, formed after the elections of October 2004, says it wants to proceed with structural reform and speed up privatization but has still to act. Telecommunications and insurance in particular remain majority-held by the public sector.
CONDITIONS OF ACCESS TO THE MARKET Means of entry Tariff barriers have been removed since 1 May 2004 when Slovenia entered the EU. Non-tariff barriers vary in substance. Since EU accession, strict controls and tests are regularly carried out by the competent authorities in the name of consumer protection. Moreover, it is still necessary to translate all product instruction notices and leaflets into Slovenian, even though the majority of the population speaks English. In the field of public procurement, one notes that in some fields (in particular public works) cartelization of the market limits access to foreign players with the tacit support of local firms. The SWIFT network is widely used for payments. Moreover, many Slovenian companies settle supplier invoices through deferred payment arrangements, thanks to their creditworthiness and good credit rating. Debt collection firms are efficient but courts, which are specialized in neither commercial nor administrative law, are very slow to examine cases.
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Foreign exchange regulations The tolar is a floating and fully convertible currency. Its central rate set at SIT239,640 to the euro, pending the setting of a fixed rate in October 2006 and entry into the euro zone in January 2007.
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PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 350
WORLD Slovenia
300 250 200
100 50
D
ec
04
-0 5
-0 4 ec
ne
D
Ju
3
04
Ju ne
03
-0 ec
ne
D
Ju
D
ec
02
-0 2
-0 1 ec
ne Ju
0
01 D
-0 ec
ne
D
Ju
9
00
-9 ec
ne
D
ne Ju
Ju
8
99
98
-9 ec D
Ju ne
ec
ne
97
-9 7
0
Ju
106
150
D
Attitude towards foreign investors Slovenian firms partially or wholly held by foreigners are treated like local firms so long as they are registered in Slovenia. The basic principle of the law on company acquisitions is that a takeover bid for the
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SLOVENIA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 33 ■ Public consumption 14 ■ Investment 16
1
Exports: 60% of GDP
Imports: 60% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
3000
3000
2500
2500
2000
2000
1500
1500
1000
1000
500
500 0
0 Germany
Italy
Croatia
Austria
France
Germany
Italy
France
Austria
Croatia
IMPORTS by products ■ All food items 6% ■ Fuels 8% ■ Ores and metals 5% ■ Chemical products 13% ■ Other manufactured goods 31% ■ Capital goods and transport equipment 34% ■ Miscellaneous 3%
EXPORTS by products ■ Chemical products 13% ■ Other manufactured goods 40% ■ Capital goods and transport equipment 37% ■ Miscellaneous 10%
STANDARD OF LIVING / PURCHASING POWER Indicators
Slovenia
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1,000 inhabitants Number of computers per 1,000 inhabitants
19,100 11,920 0.904 21.4 49 15.2 407 301
Regional average DC average 7,530 2,580 0.806 30 64 20 228 73.4
4,300 1,280 0.697 33 43 31 112 28.4
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EUROPE AND THE CIS
Spain Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
Coface analysis
42.7 1,040,00 24,361
Short-term: A1
STRENGTHS ● Dynamic household demand, largely underpinned by debt and appreciation of real property holdings, has been driving economic activity. ● Continued public sector infrastructure investment, still benefiting from European aid, has permitted the country to upgrade its out-ofdate communications networks. ● The equilibrium of public sector accounts has benefitted from the economic growth and the social security system surpluses generated by increased employment, and legislation prohibiting decentralized territorial institutions from running deficits. ● Close ties with a large part of the Americas and the use of a common language continue to hold promise for the future. ● Spain is still a first-rate tourist destination even if it has to contend with competition from lowcost destinations.
108
RISK ASSESSMENT In 2005, the continued robust growth of consumption and investment underpinned dynamic economic growth. Accommodating terms of financing, appreciation of real property assets and new job creation all tended to spur household spending. Conversely, foreign trade had a negative impact on growth with the export slowdown contrasting with the dynamism of imports. In 2006, growth should remain dynamic, buoyed by domestic demand and an export upturn
WEAKNESSES Should a downturn occur, the upsurge in housing prices linked to the shortage of social housing, increased immigration and low real interest rates constitute a threat, by spurring households to take on debt to be able to spend more. ● The competitiveness of Spanish products has suffered from an accumulated differential on inflation compared with other EU countries, and from its positioning on products with insufficient value added in the face of Asian and East European competition. ● Substantial structural unemployment has persisted in a market where well-protected employees benefiting from industry-wide agreements and price indexation rub shoulders with vast reserves of temporary workers. ● The education system, professional training and research and development are still underdeveloped. ●
in the wake of a European recovery. Low interest rates and an acceleration of foreign trade will buoy investment. However, the current account deficit will continue to widen. Notwithstanding a weakening euro, exports have continued to suffer from a loss of competitiveness, exacerbated by rising wages indexed to an inflation rate higher than the rest of the euro zone, and by positioning on low value-added products exposing the Spanish sales offer to competition from Central European countries. Meanwhile, a possible downturn in the
SPAIN MAIN ECONOMIC INDICATORS %
2001
2002
2003
2004
Economic growth Consumption (var.) Investment (var.) Inflation Unemployment rate Short-term interest rate Public sector balance (GDP) Public sector debt (GDP) Exports (var.) Imports (var.) Current account balance (GDP)
3.5 3.2 4.9 2.8 10.5 4.3 -0.3 63.0 4.0 3.9 -3.9
2.7 2.9 2.3 3.6 11.4 3.3 -0.1 61.0 1.8 3.9 -3.3
3.0 2.6 6.3 3.1 11.3 2.3 0.0 55.0 3.6 6.0 -3.6
3.1 4.4 5.6 3.4 11.0 2.1 -0.1 52.0 3.3 9.1 -5.3
2005(e) 2006(f ) 3.4 4.3 6.2 3.4 9.2 2.2 0.2 48.0 1.2 6.3 -7.7
3.2 3.9 6.6 3.0 8.5 2.2 0.1 45.0 5.1 8.1 -8.9
1
e = estimate, f = forecast
property market constitutes a risk that could put an end to the dynamism of debt-ridden households. Fiscal equilibrium will be reached thanks to the new contributions deriving from the regularization of immigrant workers, which will offset new public spending on education, research and infrastructure made necessary by EU disengagement.
The Coface payment incident index remains slightly below the world average with the favourable economic climate allowing a notable decline in bankruptcies. However, sectors like textiles, home appliances and car industry subcontracting have been particularly exposed to competition from Asia, the Mediterranean region and Eastern Europe.
MAIN ECONOMIC SECTORS Chemicals Although production rose 3 per cent in 2005, the trade balance remained in the red due to the sharp upturn of imports. Amid rising prices for oil and raw materials, companies were unable to pass on the entire increase in their production costs in sales prices, which remained stable. Competitive pressure from producer countries benefiting from less costly raw materials will increase in 2006. Moreover, the sector is concerned with the Kyoto Protocol and will have to reduce its greenhouse gas emissions by 25 per cent by 2012.
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Textiles The elimination of quotas in January 2005 and their subsequent partial reintroduction underscored the textile industry’s vulnerability to Chinese competition notably in thread and fabric. Production fell nearly 3 per cent with thousands of jobs eliminated and the
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trade balance in the red. In 2006 companies will have to reorganize to focus on high value-added niche markets and delocalize low value-added production to North African or Eastern European countries. Clothing retail chains and manufacturing companies have adjusted better to the market by delocalizing production and developing their vertical integration, which has allowed them to benefit from the good setup of their national and international operations. Steel In 2005, production rose moderately while prices fell slightly in a context of sagging demand from China and the increasing cost of energy. The market should slow in 2006 due to high stock levels and less buoyant demand. Companies will refocus on the Spanish market where the demand for flat products intended for the construction sector, car industry and home electronics will remain robust.
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109
EUROPE AND THE CIS Car industry In 2005, the number of new car registrations rose in Spain, partly offsetting the decline of sales to the EU. Car production nonetheless declined, due notably to competition from Eastern European countries, which have been capturing most new investments, and where carmakers have been channelling most of their production. In 2006, the rise in vehicle sales in the domestic market, where Renault has been the leader (before PSA, Ford and Seat), should continue thanks to replacement buying and accommodating financing terms. Ultimately, however, high fuel and steel prices could hamper vehicle sales and affect carmaker earnings performance. Besides a few large equipment manufacturers like Delphi or Ficosa, a multitude of small companies revolve around carmakers and have been squeezed between rising raw material costs and price pressure exerted by carmakers. The parts manufacturing segment has thus been particularly risky.
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Mass distribution Spanish-owned groups constitute 60 per cent of the sector with foreign companies controlling the remaining 40 per cent. Although the concentration process has continued in the sector, it has remained far below the degree reached in the other European Union countries. Regional chains have meanwhile preserved their dominant position in their markets amid the threat posed by the expansion of nationwide groups like Mercadona. Hampered by regulations, megastores grew more slowly than supermarkets. However, a new European directive intended to eliminate commercial licensing could spur the opening of megastores. As in other European countries, hard discount chains, mainly subsidiaries of German groups, have been posting dynamic sales growth. In 2006 the concentration process should accelerate notably as regards medium-size companies. Traditional retail will continue to lose market share.
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PAYMENT AND COLLECTION PRACTICES
110
on this instrument are not recorded in the RAI (Registro de Aceptationes Impagadas). An outgrowth of the Centre for Interbank Cooperation, the RAI is the most important registry at the national level, where the payment defaults of commercial companies are recorded and where banks and other deposit institutions can check a company’s payment record before extending credit. The RAI was sanctioned by the Tribunal de Defensa de la Competencia in February 2005 for undermining competition as regards free access to its files by interested third parties. SWIFT bank transfers, widely used by Spanish banks, are a quick, fairly reliable and cheap PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 400 350 300
WORLD Spain
250 200 150 100 50 0
Ju ne 9 D 3 ec Ju 93 ne 94 D ec Ju 94 ne 9 D 5 ec -9 Ju 5 ne 9 D 6 ec Ju 96 ne 9 D 7 ec Ju 97 ne 98 D ec Ju 98 ne 9 D 9 ec -9 Ju 9 ne 0 D 0 ec Ju 00 ne 0 D 1 ec Ju 01 ne 02 D ec Ju 02 ne 0 D 3 ec Ju 03 ne 04 D ec Ju 04 ne 0 D 5 ec -0 5
Payment The bill of exchange is frequently used for commercial transactions in Spain. In the event of default, it offers creditors certain safeguards, including access to the new exchange procedure (juicio cambiario) introduced by the recent civil procedure rules. Based on his or her appraisal of the documents submitted, the first instance judge (juzgado de primera instancia) may order a debtor to pay within ten days and have his or her property attached. Where a claim is contested, a court hearing is held to examine both parties’ arguments and a judgment handed down within ten additional days of the said hearing. Widely accepted though somewhat difficult to obtain, the bill of exchange guaranteed by a bank limits the risk of payment default by offering creditors additional recourse to the endorser of the bill. The cheque, which is less widely used than the bill of exchange, offers similar legal safeguards under the exchange procedure in the event of default. The same is true of the promissory note (pagaré), which, like the bill of exchange, is an instrument enforceable by law. However, defaults
■
SPAIN instrument, provided the purchaser, in good faith, orders payment. If the buyer fails to order a transfer, the legal remedy consists in instituting ordinary proceedings for non-payment of the invoice. Debt collection An out-of-court settlement begins with formal notice served by recorded delivery letter inviting the debtor to pay, within ten days, the principal increased by any past-due interest set by the parties. Barring special clauses included in the commercial contract, the applicable rate since 31 December 2004 is the interest rate applied by the European Central Bank in its most recent refinancing operation performed prior to the first calendar day of the half year concerned, increased by seven percentage points. Semi-annually, the Finance Minister publishes the rate thus determined in the Boletín Oficial del Estado. To speed up court procedures and modernize the obsolete code of civil procedure dating back to February 1881, new rules of civil procedure (ley de enjuiciamento civil) were introduced on 8 January 2001. The rules cut the time taken up by litigation significantly and give oral arguments priority over written submissions – the cornerstone of the
■
previous system – even though the authentication of large numbers of documents remains a requirement. Besides the exchange procedure, a seller unable to settle with a buyer out of court, may enforce his or her right to payment through the new civil procedure (juicio declarativo), divided into ordinary proceedings (juicio ordinario) for claims over €3,000 and oral proceedings (juicio verbal) for smaller claims. The aim of the new procedure is to speed up delivery of enforcement orders by reducing and simplifying the stages of the old procedure. In addition, for monetary claims for an overdue and payable amount under €30,000, creditors now benefit from a more flexible special procedure (juicio monitorio) initiated with a pre-printed form addressed to the judge of first instance (juzgado de primera instancia) who may, after reviewing supporting documents, order the debtor to pay within 20 days. That innovative law, with the notable establishment of a summary procedure, has been progressively gaining acceptance and breaking with the tradition of formalism acquired by the Spanish judiciary for many decades.
1
111
EUROPE AND THE CIS
Sweden Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
Coface analysis
9.0 346,400 38,515
Short-term: A1
RISK ASSESSMENT Growth sagged in 2005 due an export slowdown, despite the higher revenues derived from mineral sales and intermediate products like paper. Economic activity has nonetheless remained dynamic, buoyed by investment, which has increased sharply in the raw material and vehicle manufacturing sectors. In 2006, economic activity should accelerate thanks to further growth of consumption and an export recovery. With limited debt and a fiscal surplus, the government has been able to pursue expansionary fiscal policy (tax reductions, general spending increases, and measures to combat unemployment), which will make it possible to spur consumption amid increasing employment. In response to strong external demand in the
telecommunications and pharmaceuticals sectors, exports will rebound. Robust domestic demand will generate a commensurate increase in imports, thereby further reducing the trade surplus. Conversely, investment should grow at a slower rate with production capacities having reached very adequate levels. Those globally buoyant economic conditions, stimulated by robust household demand, should spur inflationary pressures and lead to higher – but not dissuasive – short-term interest rates. In that favourable context, the Coface payment incident index, still below the world average, declined sharply in 2005, as did bankruptcies (down 12 per cent). Company solvency should continue to improve in 2006. Vigilance will nonetheless be in order in traditionally difficult sectors, like wood, clothing, construction, hotels and food service.
MAIN ECONOMIC INDICATORS % Economic growth Consumption (var.) Investment (var.) Inflation Unemployment rate Short-term interest rate Public sector balance (GDP) Public sector debt (GDP) Exports (var.) Imports (var.) Current account balance (GDP)
2001
2002
2003
2004
1.2 0.4 -2.9 2.4 4.9 4.0 2.9 63.2 0.8 -2.6 4.4
2.0 1.4 -6.9 2.2 4.9 4.1 -0.3 62.1 1.0 -1.9 5.3
1.7 1.5 -3.0 1.9 5.6 3.0 -0.2 61.9 4.9 5.0 7.5
3.1 1.8 4.9 0.4 6.0 2.2 1.6 62.5 10.5 7.0 8.0
2005(e) 2006(f ) 2.5 2.3 11.0 0.5 6.4 1.9 1.3 61.0 4.0 4.8 7.0
3.0 2.9 6.0 1.4 5.6 2.5 0.7 59.0 6.0 6.7 6.3
112 e = estimate, f = forecast
SWEDEN PAYMENT AND COLLECTION PRACTICES
1
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Sweden
250
200
150
100
50
D
93 ec -9 3 ne 9 D 4 ec -9 Ju 4 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 97 D ec Ju 97 ne 9 D 8 ec Ju 98 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 0 D 1 ec Ju 01 ne 02 D ec Ju 02 ne 0 D 3 ec -0 Ju 3 ne 04 D ec Ju 04 ne 0 D 5 ec -0 5
0
Ju ne
Debt collection As a rule, the collection process begins with the debtor being sent a final demand by registered mail asking him or her to pay the principal amount together with any contractually agreed interest penalties. Where there is no specific interest clause in the contract, the rate of interest applicable from 1 July 2002 is the Bank of Sweden’s (Sveriges Riksbank) six-monthly benchmark rate (reporäntan), plus eight percentage points. Under the Swedish Interest Act (räntelag, 1975, last amended in 2002), interest starts to accrue 30 days after the invoice date or after a demand for payment is sent to the debtor by registered mail. Where claims meet certain requirements – denominated in Swedish krona, certain, liquid and indisputable – creditors can obtain an injunction to pay (Betalningsföreläggande) within more or less four months from the Enforcement Service, set up on 1 January 1992. This Enforcement Service (Kronofogdemyndigheten) may order a debtor to settle the claim or justify late payment within two weeks. If the debtor
■
fails to respond within four weeks, the Service issues a writ of execution at the creditor’s request. While formal, this system offers a relatively straightforward and quick remedy in respect of undisputed claims and has greatly freed up the courts. Creditors are not required to engage a lawyer but, in some circumstances, would be well advised to do so. Lacking a settlement agreement, or where claims are disputed, the Enforcement Service, if contacted previously, will no longer have jurisdiction over the dispute. Creditors must obtain legal remedy through the ordinary court process by bringing their claims before a court of first instance (Tingsrätt). It should be noted that civil courts also have jurisdiction to hear commercial disputes. Proceedings involve a preliminary hearing in which the judge attempts to reconcile the parties after examining their case documents, evidence and arguments. If the dispute remains unresolved, the proceedings continue with written submissions and oral arguments until the main hearing, where the accent is on counsels’ pleadings (defence and prosecution) and examination of witnesses’ testimonies. In accordance with the ‘immediacy of judgment’ principle, the court bases its decision exclusively on the evidence presented at the trial. It takes about 10–12 months on average to obtain a writ of execution in first instance, bearing in mind that there is a widespread tendency in Sweden to appeal against judgments.
Ju
Payment Bills of exchange and promissory notes are neither widely used nor recommended as they must meet a number of formal requirements in order to be valid. Just as the rules for issuing cheques have become more flexible, so the sanctions for issuers of uncovered cheques have been relaxed over the years. Moreover, the use of cheques has been gradually declining in favour of bank cards. Conversely, use of the SWIFT electronic network by Swedish banks provides a secure, efficient and fairly cheap domestic and international funds transfer service. However, as payment is dependent on the buyer’s good faith, sellers are advised to take great care to ensure that their bank account details are correct if they wish to receive timely payment.
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113
EUROPE AND THE CIS
Switzerland Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
Coface analysis
7.4 358,600 48,518
Short-term: A1
STRENGTHS ● Quality financial services, moderate taxes and political and social stability have attracted investors. ● A flexible labour market and a high skills level have helped keep unemployment low. ● Internationalization of large industrial and financial groups has made it possible to compensate for a small market and the moderation of economic growth. ● Social protection system reforms should allow the country to cope with an aging population.
114
RISK ASSESSMENT After a marked slowdown in the second half of 2004 economic activity recovered moderately in 2005, buoyed by robust household consumption, building industry dynamism, an industrial export recovery and increased numbers of well-off visitors from Asia, the United States and Russia. In 2006 the economy should grow moderately again, in line with the European recovery, reaching a level near its potential. The decline of unemployment under the 4 per cent threshold will encourage households to increase their spending despite federal budget tightening. Exports will benefit from an improved European demand trend,
WEAKNESSES Non-member status outside the EU, albeit tempered by bilateral agreements, has tended to limit competition and foster resistance to change. ● There is still a lack of competition, notably in administered sectors like agriculture, notwithstanding the adoption of legislation intended to make the domestic market more flexible and permit the government to exercise greater control over cartels. ● Frequent recourse to referenda and the constant search for consensus between the four parties represented within the federal government have slowed the adoption of reforms. ● Overlapping authority between the confederation and cantons has compounded marked regional disparities. ●
an inflation rate below that of its main trading partners and the Swiss franc’s past decline against the dollar and euro. Still benefiting from accommodating monetary policy, productive investment should encourage businesses to resume their investment in capital goods. The good level of the Coface payment incident index in 2005 was borne out by a 3 per cent decline in company bankruptcies. Although industry did, in general, register a moderate increase in business volume and earnings, the increased volumes did not result in improved profitability with competition, and overcapacity prevented companies from passing on higher raw material and intermediate
SWITZERLAND MAIN ECONOMIC INDICATORS % Economic growth Consumption (var.) Investment (var.) Inflation Unemployment rate Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)
2001
2002
2003
2004
1.0 2.0 -2.1 1.0 2.5 2.9 0.9 50.5 0.2 3.2 8.0
0.3 0.0 2.2 0.6 3.1 1.1 0.1 54.5 -0.7 -2.8 8.4
-0.4 0.8 -3.8 0.6 4.0 0.3 -1.4 55.5 -0.5 1.4 13.2
2.1 1.4 3.4 0.8 4.4 0.7 -1.6 55.6 9.0 7.4 14.6
2005(e) 2006(f ) 1.7 1.7 1.7 1.2 3.8 0.8 2.5 54.0 4.1 4.2 13.0
2.0 1.6 4.3 0.9 3.5 1.2 -1.4 53.5 4.8 4.1 14.0
1
e = estimate, f = forecast
product prices in their sales prices. Hotels, the food service industry and retail have remained weak. In 2006, amid not only improved trends for domestic and European economic conditions but also a
stabilization of input cost increases, the industrial company financial situation should change little and remain satisfactory. Conversely, the situation of personal services could improve.
MAIN ECONOMIC SECTORS Construction The housing segment was dynamic in 2005, which allowed companies to raise prices and increase their earnings. In public works, beyond regional differences, sluggish business conditions affected prices and thus earnings performance. In 2006, business should stabilize in the sector.
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Retail Business was sluggish in 2005, notably in food. Only retailers of clothing articles and consumer electronics registered growth. The situation is unlikely to improve in 2006.
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Tourism The 2005 summer season was mediocre due to the persistent disaffection of German clientele that the influx of non-European visitors could not completely offset. Conversely, the 2005–2006 winter season should register a recovery thanks to increases in stays by foreigners at alpine resorts. The following summer has also been shaping up
■
nicely with the recovery of demand from Germany. That trend will benefit hotels and the food service industry struggling to recover from the bad years between 2001 and 2003. Watchmaking Specialized in the high end, Swiss watchmaking has benefited from the increasing interest in luxury articles as well as the increasing numbers of potential buyers in Asia. In 2005 the sector benefited from the excellent economic conditions in the United States, Middle East and Asia, and also from the recovery of international tourist travel during which many purchases are made. Margins have been comfortable with an excellent outlook for 2006.
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Wood and furniture Thanks to a good level of business in housing, 2005 was a very good year with net increases in sales, prices and, thus, earnings. The outlook for 2006 has been good even with a slight slowdown expected.
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115
EUROPE AND THE CIS Paper and printing This sector had a poor year in 2005; sagging demand and stiff competition often forced companies to cut prices to the detriment of profitability. Overall, the papermaking industry suffered more than printing. The situation should nonetheless stabilize in 2006.
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Chemicals and pharmaceuticals Despite increasing raw material costs in 2005, dynamic sales resulted in increased earnings. Robust economic conditions in the United States and Asia together with the competitive level of the Swiss franc facilitated exports. The sector will continue forging ahead in 2006.
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PAYMENT AND COLLECTION PRACTICES Payments Bills of exchange and cheques are not commonly used owing to prohibitive banking and tax charges; the stamp duty on bills of exchange is 0.75 per cent of the principal amount for domestic bills, and 1.5 per cent for international bills. Similarly, commercial operators are particularly demanding as regards the formal validity of cheques and bills of exchange as payment instruments. SWIFT bank transfers are the most commonly used payment system. Most Swiss banks are connected to the SWIFT network, which facilitates rapid and effective payments at low cost.
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Debt collection The Swiss legal system presents technical specificities, as follows:
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●
●
116
The existence of an administrative authority (eg Office des Poursuites et des Faillites, or Betreibungs und Konkursamt) in each canton, which is responsible for executing court orders and whose functioning is regulated by federal law. Interested parties may consult or obtain extracts of the Office’s records. Specific rules for legal procedure prevail in each canton (there are 26 different codes of civil procedure), which sometimes vary greatly depending on the legal doctrine that has inspired them. As such, before instigating actions, plaintiffs should ensure that their counsel is familiar with the law of the concerned jurisdiction as well as the language to be used before the court (French, German or Italian).
These constraints impede the justice system’s speed and effectiveness. A commission of experts
has developed a proposal for unifying the various procedures that will be submitted to parliament in the future. The debt collection process commences with the issuing of notice to pay by ordinary mail or registered letter (thus enabling interest penalties to be charged). This gives the debtor two weeks in which to pay the principal amount, plus – unless otherwise agreed by the parties – interest penalties equivalent to the bank rate applicable in the place of payment. In the absence of payment, the creditor will submit a duly completed and signed petition form (réquisition de poursuite) to the Office des Poursuites et des Faillites (Enforcement and Bankruptcy Office), which then serves the debtor with a final order to pay within 20 days. While very easy to use by creditors, that procedure nonetheless permits debtors to oppose the order within ten days of being served, without having to provide grounds. In such cases, the only alternative for creditors is to seek redress through the courts. Conversely, where a seller holds unconditional proof of debt signed by the buyer (any original document in which the buyer recognizes his or her debt, bill of exchange, cheque etc), the seller may request the temporary lifting of the debtor’s opposition (main levée de l’opposition) without having to appear before the court. This is a summary procedure, quick and relatively easy to obtain, in which the court’s decision is based upon the documents submitted by the seller. Once this lifting order has been granted, the debtor has 20 days in which to refer the case before the judge to obtain the debt’s release (libération de dette). That entails initiating a formal procedure to obtain an executory order – with a written phase and an oral examination of witnesses during court
SWITZERLAND hearings – lasting from one to three years depending on the canton. Legal costs vary widely depending on the rates charged by the various cantons. Once the court hands down a final ruling, the Office des Poursuites et des Faillites delivers an execution order or, in the case of traders, a windingup petition (commination). In all cases, the law decides which measure – execution order or winding-up petition – is applied. Either a court of first instance or a district court hears legal procedures. Commercial courts, presided
over by a panel of professional and non-professional judges, exist in four Germanic cantons: Aargau, Berne, Saint Gall and Zurich. Once an appeal has been lodged with the cantonal court, as a last recourse for claims exceeding 8,000 Swiss francs, cases are heard by one of the two federal judicial institutions: the Swiss federal court, (Tribunal Fédéral Suisse or Schweizerisches Bundesgericht) in Lausanne, or the Federal Criminal Court in Bellinzone.
1
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Switzerland
250
200
150
100
50
ec -9 4 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 9 D 7 ec Ju 97 ne 9 D 8 ec Ju 98 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 0 D 1 ec Ju 01 ne 0 D 2 ec Ju 02 ne 0 D 3 ec Ju 03 ne 0 D 4 ec Ju 04 ne 0 D 5 ec -0 5 Ju
3 94 ne
D
-9
ec
Ju
D
Ju
ne
93
0
117
EUROPE AND THE CIS
Tajikistan Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
6.3 1,553 247
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT Economic activity has remained dynamic amid firm aluminium prices and cotton sales. The strong growth registered since 2000 represents a catch-up process after the deep recession of the 1990s due partly to the civil war (1992–1997). Tajikistan is still the poorest country in the CIS; structural reforms have hardly progressed. The investment rate has been extrememly insufficient and the country has been vulnerable to price trends for raw materials, which have represented over 85 per cent of exports. Despite
increased transfers of expatriate revenues, (the country’s main resource at one-third of foreign currency earnings) external accounts have deteriorated sharply due to the higher oil prices. In the political arena, the legislative elections of February 2005 consolidated President Rakhmonov’s power. A constitutional amendment will allow him to run in 2006 for a third consecutive term. However, that concentration of power could rekindle tensions that had eased after the 1997 peace accord. Meanwhile, economic and military relations with Russia have grown stronger.
MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ millions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
10.2 12.5 -0.1 652 773 -121 -7.1 98.4 13.2
9.1 14.5 -0.1 699 823 -124 -2.7 82.3 11.1
10.2 13.7 0.9 900 1,003 -103 -1.7 66.3 8.2
10.6 5.6 0.7 1,088 1,239 -151 -4.0 41.1 6.4
8.0 7.0 -0.1 1,119 1,349 -230 -4.9 38.4 8.4
7.0 5.0 -0.5 1,212 1,433 -221 -4.3 37.6 6.8
1.9
1.8
1.9
1.8
1.9
2.2
118 e = estimate, f = forecast
TURKEY
Turkey Population (million inhabitants) GDP (US$ million)
70.7 240,376
1
Short-term: B
Coface analysis
Medium-term: Moderately high risk
STRENGTHS ● Turkey has enjoyed the support of the international community due notably to its exceptional geographic position. ● EU accession negotiations should speed up the reform process. ● Public sector finances have undergone a marked consolidation since the 2001 crisis. ● Bank solvency and the quality of bank assets have also made considerable progress. ● Disinflation policy has been successful. ● A diversified and dynamic private sector has been capable of adapting quickly to an unstable environment.
RISK ASSESSMENT After the exceptional 2004 expansion, economic growth returned to a sustainable pace in 2005, just above 5 per cent. Robust domestic demand, buoyed by investment, is still the economy’s main driver. Despite rising oil prices, meanwhile, inflation has been under control. Company payment behaviour has thus remained satisfactory with the Coface payment incident below the world average. Strong growth should continue in 2006 at about a 5 per cent rate. The country has made remarkable progress since the 2001 crisis, mainly on disinflation, public sector finances and bank restructuring. Price inflation eased from a high of 73 per cent early-2002 to under 8 per cent, the central bank’s objective for
WEAKNESSES Turkey’s substantial external financing needs – the largest of all emerging countries – have made it very dependent on market sentiment. ● Currency crisis risk has been very high with the real exchange rate appreciating in the context of a widening current account deficit. ● The country has been very dependent on hydrocarbon imports. ● The Cyprus-status issue, minority Kurd situation, the question of secularism and the army’s role could ultimately undermine a now stable political situation and make Turkey’s admission to the EU more difficult. ●
2005. The public sector deficit dropped to 3 per cent of GDP from 17.2 per cent in 2002. Tight fiscal and monetary policy and radical bankingsector restructuring have consolidated the situation without undermining growth. The country’s large and growing external financing needs, affected by oil prices and company investment, have become the major source of concern. With those needs still mostly covered by volatile capital despite increased FDI, currency crisis risk has been high and subject to mood swings by investors and financial backers. Possible domestic political tensions or dissension on negotiations with the EU could cause a change in market sentiment, currently very favourable to Turkey.
119
EUROPE AND THE CIS MAIN ECONOMIC INDICATORS 2005
2006(f )
US$ billions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector deficit (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS&T exports) Foreign exchange reserves (in months of imports)
-7.4 68.4 19.0 35.3 39.7 -4.5 3.4 2.3 77.9 62.5
7.8 29.8 -17.2 39.8 48.2 -8.4 -1.5 -0.8 69.1 56.5
5.8 18.4 -11.7 51.2 65.2 -14.0 -7.9 -3.3 59.6 42.9
8.9 9.3 -5.4 67.0 90.9 -23.9 -15.5 -5.1 53.4 32.5
5.7 7.7 -0.6 77.2 109.5 -32.3 -22.3 -6.2 47.4 33.8
5.6 5.0 -0.2 83.7 121.3 -37.6 -26.0 -6.4 46.9 32.4
4.2
5.2
5.0
3.9
4.6
4.8
e = estimate, f = forecast
the rights of foreign investors, harmonize the definitions of investment and investor with international standards, and replace the system of prior authorizations and approvals with a new information system. Another provision waives the requirement on foreign investors to put up at least US$50,000 in equity and obtain prior approval from the Directorate General for Foreign Investment (DGIE) at the Office of the UnderSecretary of State for the Treasury. The latter formality has been replaced by the obligation to inform the competent authorities. However, the opening of a branch office remains subject to DGIE approval. FDI volumes have climbed sharply since 2003, following their decline in 2002 as a result of the financial crisis. From their low of US$1 billion in 2002 (compared with US$3.26 billion in 2001),
CONDITIONS OF ACCESS TO THE MARKET Means of entry The Turkish market is open to foreign goods and services. The customs union with the EU covers all economic sectors except unprocessed agricultural products and services. Turkish companies are particularly keen to enter into partnerships and joint ventures. All means of payment are used and accepted. Documentary credit is strongly recommended for initial transactions and during periods of economic instability. It should preferably be opened with a foreign bank, although Turkish companies generally favour their own banks. Documentary credit based on acceptance is the most widely used instrument. However, because of its high cost, cash against documents or payment against goods are often preferred by Turkish importers. Several inspection companies of international standing have offices in Turkey.
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PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Turkey 250
120
200
150
100
50
ne Ju
D
93 ec -9 3 ne 9 D 4 ec -9 Ju 4 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 97 D ec Ju 97 ne 9 D 8 ec Ju 98 ne 99 D ec Ju 99 ne 0 D 0 ec Ju 00 ne 0 D 1 ec Ju 01 ne 02 D ec Ju 02 ne 0 D 3 ec Ju 03 ne 0 D 4 ec Ju 04 ne 0 D 5 ec -0 5
0
Ju
Attitude towards foreign investors On 5 June 2003, Turkey’s Grand National Assembly passed a law regulating FDI in the country. The purpose of this law is to limit the number of administrative restrictions and permits, while protecting the rights of foreign investors. Article 1 of the law aims to encourage FDI, protect
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TURKEY FDI inflows rose to US$1.56 billion in 2003, US$2.56 billion in 2004 and US$2.9 billion in the first eight months of 2005. Despite this
improvement, FDI accounts for less than 1 per cent of GDP, making Turkey less attractive to foreign investors than other emerging economies.
1
OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 51 ■ Public consumption 11 ■ Investment 18
Exports: 28% of GDP
Imports: 31% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
6000
10000
5000
8000
4000
6000
3000 4000
2000
2000
1000 0
0 Germany
USA
UK
Italy
France
Germany
Italy
Russia
France
UK
IMPORTS by products ■ Fuels 17% ■ Ores and metals 5% ■ Chemical products 15% ■ Other manufactured products 20% ■ Capital goods and transport equipment 31% ■ Miscellaneous 12%
EXPORTS by products ■ All food items 10% ■ Other manufactured products 54% ■ Capital goods and transport equipment 26% ■ Miscellaneous 10%
STANDARD OF LIVING / PURCHASING POWER Indicators
Turkey
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
6,710 2,800 0.75 30.7 67 28.3 268 44.6
Regional average DC average 7,530 2,580 0.806 30 64 20 228 73.4
4,300 1,280 0.697 33 43 31 112 28.4
121
EUROPE AND THE CIS
Turkmenistan Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
4.9 6,201 1,265
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT Hydrocarbons, mainly gas, are still the main economic driver. The cotton harvest, the country’s other resource, was disappointing in 2005. The growth rate was nonetheless high and should remain so in 2006 despite a moderate slowdown. Although Turkmenistan’s gas reserves offer substantial potential, its geographic and political isolation has impeded its development. Landlocked, the country has been dependent on Russia and Ukraine for its hydrocarbon exports. A long-term contract (25 years) on gas supply already ties Turkmenistan to Russia; Ukraine would also like to conclude an agreement of comparable duration but the discussions have been difficult. The main
stumbling blocks have been differences on price, the inadequacy of the pipelines (whose enlargement would require substantial investment) and relative uncertainty as to the true extent of Turkmen gas reserves. Those issues have also been impeding concretization of a project to build a network to the Indian subcontinent via Iran, which must also overcome strong American reticence. Politically, the regime has been isolated. The ‘colour revolutions’ in Georgia, Ukraine and Kyrgyzstan could undermine a regime that has remained at once paternalistic, very authoritarian and marked by a powerful personality cult. The economy has remained centralized with the arbitrariness of decision making not conducive to investment.
MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ billions
2001
2002
2003
2004
Economic growth (%)* Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
20.4 11.7 0.6 2.6 2.2 0.4 0.4 51.8 17.3
12.0 7.8 -10.0 2.9 2.1 0.7 3.7 38.6 35.0
13.0 2.7 -10.0 3.5 2.5 1.0 1.8 29.2 37.0
8.0 4.0 -9.0 3.9 3.3 0.6 -5.6 24.6 36.0
11.0 10.0 -8.0 4.7 3.8 1.0 -0.2 19.4 36.0
9.0 10.5 -8.0 5.0 4.3 0.7 -3.8 18.7 36.0
8.8
13.0
10.0
8.2
7.6
7.0
122 * Source: EIU Economic Intelligence Unit
e = estimate, f = forecast
UKRAINE
Ukraine Population (million inhabitants) GDP (US$ million)
48.4 49,537
1
Short-term: C
Coface analysis
Medium-term: High risk
STRENGTHS ● The economy is relatively diversified (food sector, heavy and light industries). ● Ukraine benefits from transit fees levied on Russian gas exports to Western Europe. ● The workforce is skilled and low cost. ● Public sector debt had remained under control.
RISK ASSESSMENT Economic growth sagged markedly in 2005 amid less buoyant external conditions, particularly for the steel industry, and investment sluggishness linked to uncertainties surrounding government policy on privatization. Higher wages and social spending contributed to stoking inflation. Growth should pick up again in 2006 thanks to improvement in the business climate after the election of a new parliament. The current account surplus should nonetheless continue to decline amid falling steel prices and increasing domestic demand. The higher gas prices recently imposed by Russia could, moreover, affect external accounts and industry.
WEAKNESSES Restructuring the metallurgy sector – responsible for almost 40 per cent of exports – has been lagging. ● Ukraine is still dependent on Russia for its energy supply and as a market for a large proportion of its metal exports. ● Ideological, geographic and linguistic divisions can affect the government’s capacity to implement needed reforms. ●
Foreign investor interest has nonetheless been growing as evidenced by the successful reprivatization of the country’s leading steel mill. With Ukraine’s public external debt under control, international agencies have upgraded the country and risk premiums have eased substantially. Foreign exchange reserves have been replenished. Persistent governance deficiencies have nonetheless continued to deter capital inflows. In the run-up to the March 2006 legislative elections the sluggish economic conditions, persistent corruption and tensions with Russia have been hurting the Ukrainian president’s image. With no party able to win a majority on its own, it will be necessary to form a coalition likely to prove unstable in the long run.
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EUROPE AND THE CIS MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ billions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
9.2 6.1 -1.5 17.1 16.9 0.2 1.4 3.7 55.5 6.2
5.2 -0.6 0.2 18.7 18.0 0.7 3.2 7.5 52.1 5.0
9.6 8.2 -0.1 23.7 24.0 -0.3 2.9 5.8 47.5 5.7
12.1 12.3 -3.6 33.4 29.7 3.7 6.8 10.5 46.1 4.5
3.5 14.0 -2.8 37.9 36.8 1.1 4.8 6.0 43.6 4.5
5.5 13.0 -3.1 40.2 42.8 -2.6 1.2 1.2 41.3 4.8
1.7
2.4
2.9
3.2
5.4
5.2
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview The economic situation in Ukraine in 2005 was less favourable than in 2004. The economy has slowed down considerably. Consumption alone drives growth, while investment is declining and the trade balance remains in deficit. It is nevertheless offset by the service balance and the current account, which continues to show a large surplus. Inflation is rising at an alarming rate. The agri-foods and automotive sectors are expanding, while metalworking has been hit by the slump in world demand as well as steel prices. The government’s Liberal attitude has led Ukraine to actively prepare, on the back of swift reforms, its transition to a market economy as well as future WTO accession, which is unlikely to occur in 2005 as the government had wished.
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Means of entry Steps have been taken to facilitate market access in Ukraine. The prospect of WTO accession has led the Tymochenko government to remove or reduce tariff barriers, in particular for cars, mobile telephony and vegetable oils. However, implementation is slow. Despite the introduction of a new customs code in January 2004 and mass dismissals of senior customs officers in January 2005, customs
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clearance formalities are often tedious in a country where the grey economy is estimated at 40–50 per cent. Product certification procedures exacerbate import restrictions, while ISO certification is deemed inadequate. Locally based foreign companies often have to submit to untimely inspections by the tax authorities. Red tape remains a problem. Significant progress has been made on VAT refunds however, with Mr Yekhanourov’s government committed to tackling this issue and fully refunding arrears at the end of 2005. There has been little movement towards the establishment of a judicial framework for bankruptcies. Moreover, the government has shelved plans to cut VAT and corporation tax, which remained at 20 per cent and 25 per cent respectively in 2005. Ukraine has stepped up intellectual property protection, but its efforts in this regard are deemed unsatisfactory by the international community. Attitude towards foreign investors Apart from the reprivatization of Kryvorijstal, foreign investment in Ukraine declined in 2005 despite the combined efforts of President Louchtchenko and the former prime minister, Loulia Tymochenko, to win over investors at world economic forums such as the mini-Davos in Kiev. There is a genuine desire on the part of the new government to improve the business climate and
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UKRAINE promote foreign investment but its efforts in this field have been foiled by the impact of the announcement of reprivatizations and the elimination of special economic zones (SEZs), whose relaunch in line with WTO rules is under review. The confusion over the number of companies concerned by reprivatization and the squabbles within the government over this question has had the effect of encouraging a wait-and-see attitude on the part of potential foreign investors. The only reprivatization to have been carried out is that of Ukraine’s leading steelmaker Kryvorijstal, acquired by Mittal Steel for a total of US$4.8 billion.
While there is a real will to open up the capital of public sector enterprises, it is still not known whether new reprivatizations will be undertaken. However, the government has agreed to pay compensation to companies hit by the abolition of the SEZs. Players across all sectors of the economy are looking for foreign partners. This is especially true of the banking sector where certain takeovers were negotiated in 2005 (Agio, Aval, UkrSibbank), with others to follow soon. There is a growing interest in Ukraine among European investors, including some from the new member states of the EU.
1
125
EUROPE AND THE CIS OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 41 ■ Public consumption 11 ■ Investment 13
Exports: 43% of GDP
Imports: 48% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
5000
10000
4000
8000
3000
6000
2000
4000
1000
2000
0
0 Russia Germany
Italy
China
Russia
Turkey
Germany Turkmen- Poland istan
Italy
IMPORTS by products ■ All food items 6% ■ Fuels 39% ■ Chemical products 10% ■ Other manufactured goods 17% ■ Capital goods and transport equipment 21% ■ Miscellaneous 7%
EXPORTS by products ■ All food items 13% ■ Fuels 9% ■ Chemical products 8% ■ Ores and metals 9% ■ Other manufactured goods 44% ■ Capital goods and transport equipment 14% ■ Miscellaneous 3%
STANDARD OF LIVING / PURCHASING POWER
126
Indicators
Ukraine
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1,000 inhabitants Number of computers per 1,000 inhabitants
5,430 970 0.766 23.2 68 16 216 19
Regional average DC average 7,530 2,580 0.806 30 64 20 228 73.4
4,300 1,280 0.697 33 43 31 112 28.4
UNITED KINGDOM
United Kingdom Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
Coface analysis
59.8 2,131,100 35,650
1
Short-term: A1
STRENGTHS ● Moderate taxation, procedural simplicity and privileged access to the Anglo-Saxon world have attracted foreign investors. ● The presence of many financial institutions has contributed to the City’s influence as Europe’s leading financial centre. ● The devolution of powers to Scotland and Wales will foster their economic development. ● High value-added sectors like pharmaceuticals, aviation and electronics have been developing rapidly. ● Labour-market flexibility and employment agency efficiency have kept unemployment down. ● Public-sector debt has remained low despite reemergence of a fiscal deficit.
RISK ASSESSMENT Economic growth declined markedly in 2005 amid a consumption and investment slowdown. High interest rates and a less buoyant property market have affected overindebted households. In that less favourable context, companies have been wary of investing. However, public sector investment has increased markedly in the education, transport and health areas. In 2006 economic activity should recover, thanks to a positive foreign-trade contribution to growth and an investment upturn. Stronger European demands will spur export growth.
WEAKNESSES Overall productivity has suffered from the deficiencies of public services like transport, health and education. ● The traditional industrial sector continues to face stiff foreign competition. ● The risk of the property bubble bursting has persisted. ● The limited level of basic state pensions could ultimately create problems with private pension funds being insufficiently developed. ● Fiscal equilibriums have been deteriorating amid less buoyant economic conditions in face of substantial spending needs. ●
Imports will increase at a slower pace due to the still-negative impact of interest rates on consumption. Meanwhile, investment should recover, buoyed by economic conditions in the euro zone and contimued public-sector investment. Fiscal policy will underpin the growth at the expense of a near 3 per cent budget deficit. The Coface payment index has been well below the world average. Companies will nonetheless have to adapt to more moderate growth with industry remaining particularly vulnerable in a context of fierce competition. A resurgence of bankruptcies has emerged in the retail sector, which constitutes a trend
127
EUROPE AND THE CIS MAIN ECONOMIC INDICATORS % Economic growth Consumption (%var.) Investment (%var.) Inflation Unemployment rate Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (%var.) Imports (%var.) Current account balance (%GDP)
2001
2002
2003
2004
2005(e) 2006(f )
2.3 2.9 1.8 1.2 5.1 5.0 0.7 41.2 2.9 4.9 -2.2
2.0 3.3 0.3 1.3 5.2 4.0 -1.5 41.5 0.1 4.1 -1.8
2.5 2.6 -2.2 1.4 5.0 3.7 -3.5 42.0 1.2 1.3 -1.5
3.2 3.6 3.6 1.3 4.7 4.7 -3.2 44.0 3.9 5.9 -2.2
1.7 1.7 2.2 2.2 4.9 4.6 -3.3 43.1 4.6 4.2 -2.1
2.2 1.8 3.7 2.0 5.0 4.9 -3.0 46.0 5.1 3.9 -1.9
e = estimate, f = forecast
reversal in comparison with previous years and has raised fears of the phenomenon spreading to certain industries (eg cars, furniture) in 2006. Conversely,
the business-to-business finance and services sectors have continued to enjoy strong growth, which has benefited company financial situations.
MAIN ECONOMIC SECTORS Retail In 2005 sales suffered from the effects of the highinterest rate policy pursued by the Bank of England to contain household indebtedness, which ultimately undermined consumption. Bankruptcies by companies in the sector increased in consequence, notably in the electronic equipment and home electronics segments. In 2006 the sales outlook should remain gloomy, with consumption still relatively sluggish. In that context, the most buoyant segments will be hard-discount supermarkets and online retail, which has been developing strongly and causing a consequent reduction in store traffic.
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Car industry The number of new car registrations fell in 2005 and that trend should persist in 2006. A domestic demand slowdown was responsible for that decline. In a context of cut-throat competition and reduced competitiveness, sector companies have continued to rationalize their production costs. However, the pressure on the branches of the main world players
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remains very severe. The last British car-maker, MG Rover, had to resign itself to initiating a legal settlement procedure. Parts manufacturers, depending directly on car-makers, have also found themselves in difficulty. Construction After the robust growth of recent years, property prices stabilized in 2005. In 2006 the continuing tight monetary policy should further slow residential property sales. The housing shortage and renovation of some districts will nonetheless bolster demand, whereas a shortage of skilled labour has slowed implementation of some projects. The sector will continue to benefit from government spending on public buildings.
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Steel Steel prices were less buoyant in 2005. Steelmakers like the Anglo-Dutch Corus thus decided to refocus on the English market and limit their production capacity, thereby protecting their margins amid rising raw material, energy and transport prices.
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UNITED KINGDOM Downstream, companies have had greater difficulty passing on production costs in sales prices. In 2006 the price trend will vary by segment. Products intended for the construction sector should thus undergo sharper price increases than those used in the car industry. Telecommunications In 2005 the telecommunications sector returned to stronger growth and the concentration process continued with Spanish giant Telefonica acquiring O2, the British mobile telephony leader, in November. The local historic operator British Telecom is still the dominant player even if it has lost market share due to the liberalization process. In 2006 the sector should benefit from strong demand. However, the downward pressure on prices accentuated by the increasing number of players, the size of investments with uncertain
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results (such as those in 3G technology), as well as the decreasing useful life of technologies, should affect company earnings with the smallest and most specialized players being the most vulnerable. Pharmaceuticals The UK’s pharmaceuticals industry is very competitive, contributing 10 per cent of the worldwide research and development effort. The world’s third leading exporter, it represents the fifth largest country market. In 2005 pharmaceutical product sales rose 4 per cent, reaching US$15 billion. Moreover, the two major players in the British pharmaceuticals sector, AstraZeneca and GlaxoSmithKline, improved their margins with sales growing strongly. The sector has been contending, however, with a shortage of skillled personnel and the increasing cost of research and compliance with European regulations.
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1
PAYMENT AND COLLECTION PRACTICES Payment Although cheques are widely used as a method of payment, they do not provide real security as nonpayment of cheques is not a criminal offence (cheques do not have to be covered when issued). The drawer of a cheque may stop payment at any time. Cheques can be presented for cashing a second time under the RDPR (Refer to Drawer Please Represent) option. The bill of exchange, while rare in commercial transactions, is used in special cases. If a foreign bill remains unpaid at maturity, it must be protested. The open account system, which makes it possible to reduce costs, especially in case of continuing business, can only work effectively after the co-contracting party establishes mutual trust and confidence. Bank transfers are regularly used for domestic and international settlements, particularly via the SWIFT electronic network, a rapid and secure system. Leading British companies also use two other highly automated interbank transfer systems – BACS (Bankers’ Automated Clearing Services) and CHAPS (Clearing House Automated Payment Systems).
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Debt collection Debt collection agencies or solicitors handle the recovery of overdue payments, which begins with the service of formal notice reminding the debtor of his or her contractual obligations, increased by past-due interest. Under the Late Payment of Commercial Debts (Interest) Act 1998, small companies are entitled – from 1 November 1998 – to demand default interest from large companies, both public and private. This law, introduced in successive stages with the last stage coming into effect on 7 August 2002, now permits all commercial companies to bill interest in cases of late payment. Save as otherwise provided between the parties, the applicable rate of interest is the Bank of England's base rate (dealing rate), in effect before the first day of the six-monthly period concerned, plus eight percentage points. A creditor initiates the legal collection process by lodging a claim form with the competent legal authority, accompanied by the supporting documents. Summary judgments, speedier rulings obtained during ordinary proceedings, are more difficult to obtain by the claimant on claims contested by the defendant.
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EUROPE AND THE CIS Devices for speeding up proceedings include the creation of three separate legal tracks – small claims track, fast track and multitrack – according to the claim amount at stake, the streamlining of the supporting document-submission and evidencedisclosure system, and establishment of a hearing schedule by the court at the outset of proceedings. Judgments are enforced either through conventional methods (service by bailiff, attachment of debtor assets with subsequent
auction) or more directly for claims exceeding £750 by formally serving a statutory demand for payment. Then, after expiry of a 21-day period and without settlement, transaction or provision of a payment guarantee, the creditor may file a windingup petition with the court. To elicit a speedier reaction or payment by debtors, the statutory demand procedure may be used in some cases to collect uncontested claims directly without obtaining a prior ruling.
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD United Kingdom
250
200
150
100
50
130
ec -9 4 ne 9 D 5 ec Ju 95 ne 9 D 6 ec -9 Ju 6 ne 9 D 7 ec Ju 97 ne 9 D 8 ec Ju 98 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 0 D 1 ec Ju 01 ne 0 D 2 ec Ju 02 ne 0 D 3 ec Ju 03 ne 0 D 4 ec -0 Ju 4 ne 0 D 5 ec -0 5 Ju
3 94 ne
D
-9
ec
Ju
D
Ju
ne
93
0
UZBEKISTAN
Uzbekistan Population (million inhabitants) GDP (US$ million)
25.6 9,949
1
Short-term: D
Coface analysis
Medium-term: Very high risk
STRENGTHS ● Uzbekistan boasts substantial mining wealth, including hydrocarbons and especially gold. ● The region’s most populous country, it offers substantial market potential. ● It is strategically positioned at the historic and geographic heart of Central Asia. ● Debt rations have been moderate amid relatively tight fiscal policy.
RISK ASSESSMENT Economic growth has been dynamic, thanks not only to high raw material prices, but also to increased cotton production spurred by the privatization of farms. Economic activity should remain dynamic in 2006, driven by external demand and large hydrocarbon and gold projects. Uzbekistan has been running large current account surpluses with exports buoyed by high gold and hydrocarbon prices.
WEAKNESSES The country has been very vulnerable to price trends for raw materials, which have represented over 90 per cent of exports. ● State control of the economy has been a major obstacle to growth. ● The banking sector has been very weak. ● Deterioration of living standards and social indicators since independence has contributed to the development of radical Islamism. ●
However, governance problems and political tensions have weakened the country. The business climate has not been very conducive to developing sustainable growth. Reforms intended to open the economy are still timid and severe restrictions on trade have persisted. Meanwhile, a lack of transparency has raised doubts as to the public sector’s financial solidity. The political situation has remained shaky; firm repression of all oppositions has not prevented turmoil, as evidenced by the Andijan riots.
131
EUROPE AND THE CIS MAIN ECONOMIC INDICATORS US$ millions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2001
2002
2003
2004
2005(e) 2006(f )
4.1 3.1 1.5 7.4 5.0 4.0 58.2 31.3 6.9 15.5 7.0 7.0 -1.3 -1.9 0.1 0.4 -3.7 -3.1 2,740 2,510 3,240 4,263 4,709 4,678 2,554.0 2,186.4 2,404.9 3,061.0 3,520.0 3,642.0 186.0 323.6 835.1 1,202.0 1,189.0 1,036.0 -113 117 881 1,194 1,137 972 -1.6 1.2 8.7 10.1 8.1 5.8 60.0 54.3 44.6 37.9 38.4 34.7 25.8 23.4 24.8 23.7 23.7 23.7 5.4
4.9
6.2
6.4
6.3
6.4
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview Uzbekistan signed Article 8 of the IMF charter on 15 October 2003 and at the same time declared full convertibility of its currency. It has since made slow and steady changes to its trade legislation, but has fallen short of full market liberalization. That is why Uzbekistan is not yet an easy market for foreign firms, especially small and medium-sized ones. The volume of ordinary trade is small; imports are limited to foodstuffs such as sugar, oil and flour. Big companies, though, can find business opportunities if they arrange appropriate project funding. To rein in debt, the government has decided to act on the advice of international financial institutions and limit the sovereign guarantee facility to genuine priority areas. The country’s debt servicing capacity is, in fact, restricted by volatile export revenues derived mainly from cotton and gold. The absence of a government guarantee makes it difficult, though not impossible, to mount projects. International organizations like EBRD, Asian Development Bank (ADB) and IDB are ready to assist projects that help open market access and develop the private sector. However, decision making is slow and there are frequent price reviews because of exchange rate fluctuations. This makes it all but impossible to do without a hedge against exchange risk.
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The Uzbek Chamber of Commerce, set up in 2004, in actively involved in facilitating relations between Uzbek and foreign firms. Its task is that of limiting all too frequent state intervention, but progress so far has been slow. There is also a European business group responsible for advising and assisting European firms and helping the Uzbek government to free up market access. Means of entry Market access is the focus of regulatory and legislative reforms, in keeping with the opening up of the foreign exchange market to the national currency. Currently all sectors are open, except those considered strategic. There are no special restrictions on imports of consumer and capital goods. The recommended means of payment remains the irrevocable and confirmed letter of credit. Payments in hard currency are no longer limited by the currency’s convertibility, but by the shortage of foreign exchange at the banks of prospective customers (see Foreign Exchange Regulations, below).
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Attitude towards foreign investors Uzbek legislation offers investors safeguards against discrimination, nationalization and expropriation, while authorizing free repatriation of profits and capital. The only constraint is the availability of
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UZBEKISTAN foreign exchange. Red tape remains the biggest obstacle, but legislation on this issue is under review. Uzbekistan is privatizing its enterprises and a list of companies for sale has been drawn up. However, the majority of these enterprises have either filed for insolvency or exist only on paper. For takeovers, the rule is to get foreign investors to renew the production apparatus, although they are not required to retain existing staff. In strategic sectors, such as cotton and its derivatives, gold, energy and aeronautics, foreign shareholdings are subject to a 40 per cent ceiling, with the Uzbek government retaining a majority stake. Uzbekistan is a member of the Islamic Development Bank and
receives assistance from major multilateral financial institutions (eg IBRD, ADB, World Bank). Foreign exchange regulations The currency has been fully and freely convertible since 15 October 2003. However, the country manages its currency flows with a great deal of caution. This may help it avert a crisis and control inflation, but it is not conducive to sweeping currency liberalization. The exchange rate seems to have steadied. The main problem facing firms doing business or making an investment is the shortage of foreign exchange. It takes on average under a month to obtain foreign exchange.
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1
133
EUROPE AND THE CIS OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 44 ■ Public consumption 15 ■ Investment 13
Imports: 30% of GDP
Exports: 37% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
500
600
400
500 400
300
300 200
200
100
100
0
0 Russia
China
Ukraine Tajikistan Bangladesh
Russia
USA
South Korea
Germany
China
IMPORTS by products ■ Industiral equipment 44% ■ Plastics 13% ■ All food items 10% ■ Miscellaneous 33%
EXPORTS by products ■ Cotton fibre 20% ■ Energy 10% ■ Industrial equipment 10% ■ Miscellaneous 60%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
134
Uzbekistan 1,720 420 0.694 22 37 33.3 67 n/a
Regional average DC average 7,530 2,580 0.806 30 64 20 228 73.4
4,300 1,280 0.697 33 43 31 112 28.4
The Americas 2 US Economic Growth Will Moderate
136
Chile’s Growth Outlook Remains Strong
139
The Range of Country @ratings in the Americas
142
Argentina Bolivia Brazil Canada Chile Colombia Costa Rica Cuba Dominican Republic Ecuador El Salvador Guatemala Haiti Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru United States Uruguay Venezuela
147 151 154 157 160 164 167 168 172 173 176 177 181 182 183 184 187 188 189 192 195 199 202
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OUTLOOK FOR 2006
US Economic Growth Will Moderate Experts from Oxford Analytica, Oxford
DP growth will moderate from its strong 2004–2005 rates, but remain healthy. However, persistent imbalances mean that considerable downside risk remains. Growth prospects are fair during the year ahead, principally due to the unique ‘flexibility’ of the US economy. Outgoing Federal Reserve Chairman, Alan Greenspan, often praises this quality.
G
KEY INSIGHTS ➙ Economic growth will moderate to a 3 per cent annual rate. ➙ Although the economy will probably work through its serious structural imbalances, the danger of a more serious downturn remains. ➙ A housing market collapse is possible, given rising interest rates and historical trends. ➙ Rising energy prices could still have an impact on consumer spending. ➙ High openness to trade. ➙ Liberal labour markets. ➙ Deep and innovative financial markets. ➙ Relatively low regulation. These features allow the private sector to adjust to volatile market conditions with relative ease. Labour productivity growth has been strong, averaging about 3 per cent a year for the past three years. Combined with healthy anticipated investment spending, this sets the stage for continued growth.
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Moderating growth. While economic statistics have firmed in the months since Hurricane Katrina, growth will probably moderate to around 3.0 per cent next year. Several factors will act as a restraining influence: ●
●
●
Energy prices. Oil prices will be a factor in the slowdown. This winter, high oil and natural gas prices will reduce real disposable incomes. Econometric models suggest that a US$20 per barrel increase in the price of oil shaves GDP growth by 0.75 per cent during the first two years after the price rise. Housing sector. A slowing housing sector also points toward decelerating growth. Rising housing prices have been a boon to consumer spending over the past few years. Refinancing has allowed consumers to borrow against the value of their homes and continue to spend at high rates. This process has injected roughly US$100–120 billion into consumers’ pockets each year for the past four years. Consumer spending. The United States has the most consumption-dependent economy in the developed world. The household savings rate is now zero. Signs of a slowdown in housing are already apparent in some regions of the country. If such a slowdown were modest, with housing starts dropping from the current annualized monthly rate of about 2 million to 1.8–1.9 million, this critical sector would shift from being a growth engine, to merely treading
US ECONOMIC GROWTH WILL MODERATE water. Combined with the continued steady rise in interest rates, this could restrain consumer spending. Inflation. Inflation, which picked up noticeably this year, should remain contained. Assuming oil prices remain below 60 dollars per barrel, the worst effects on consumer prices are probably in the past. Furthermore, strong labour productivity growth is helping (as it has for a decade) to keep inflation in hand. Monetary policy. The Federal Reserve is doing its part to combat inflation by raising the federal funds rate, and should continue to do so through the end of Greenspan’s term in January and during the first quarter. Incoming Chairman, Ben Bernanke, will probably wish to establish his inflation-fighting credentials, and may continue the Reserve’s series of rate hikes a step beyond the point where Greenspan would have paused. There is still some room to raise interest rates without choking off economic growth: a neutral monetary policy would imply a real interest rate (deflated by core inflation) of 2.5–3.0 per cent. Since core inflation should remain in the 1.5–2.0 per cent range, this suggests a neutral Federal Reserve funds rate of 4.0–5.0 per cent – up to 100 basis points above the current 4.0 per cent rate. Fiscal policy. Although monetary policy seems to be on a sound footing, fiscal policy is in poor shape. In the fourth year of a broad-based economic expansion, it is hard to justify a federal budget deficit of 3.5–4.0 per cent of GDP. This reflects Congress’s inability to make tough choices on budget priorities. A potential remedy is available – the Budget Enforcement Act of 1990 contributed to fiscal surpluses during the late 1990s. Greenspan advocates a revival of this ‘pay-go’ law, which would require Congress to pass fiscally neutral legislation after the start of a budget year. Any spending hikes or tax cuts would be statutorily required to be offset by tax increases or spending cuts elsewhere in the budget. However, the prospects of fiscal austerity during an election year are slim.
Current account. The United States is running an enormous current account deficit, in excess of US$700 billion, or more than 6 per cent of GDP. This reflects both government and consumer profligacy: the poor fiscal situation and the zero household savings rate have both contributed to the problem. The United States must attract US$3 billion in foreign capital every day to pay for imports. However, the most likely scenario for the current account deficit, given the current political climate, is a continued increase. Downside risks. Uncertainties in the outlook for the economy fall mostly on the downside. Economic growth has been healthy for the past few years, but there are many imbalances, such as: ● ● ● ●
over-consumption and under-saving; current account and fiscal deficits; rising energy costs; and a potential housing bubble.
These imbalances are interrelated. This means that a potential downturn in one area could have an outsized ‘ripple’ effect: ●
●
Housing collapse. The recent run-up in interest rates by the Federal Reserve could cause a significant slowdown in the housing market. This could have compounding negative effects on consumption if cash-out refinancing is sharply curtailed. When the housing market falls, it tends to fall precipitously. In the last four housing sector downturns, dating back to 1970, when housing starts have fallen, they have retrenched by an average of 50 per cent – from about 2 million housing starts at an annualized monthly rate (roughly the current figure), to around 1 million. Each of these four housing downturns has helped create a recession. If housing starts drop to 1.5–1.3 million, a significant US slowdown is probable. Energy prices. Energy prices remain a threat. This winter, energy bills could curtail consumer spending and raise household debt levels more than expected. Furthermore, high energy prices
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THE AMERICAS
●
138
could contribute to negative industry effects, especially among hard-pressed automobile manufacturers. General Motors (GM) and Ford are unduly dependent on sales of gasolineguzzling sport-utility vehicles (SUVs) and light trucks (about two-thirds of their sales). Plunging sales would produce further layoffs. GM has already announced 30,000 worker redundancies. Financial crisis? It is possible that these imbalances could produce a sudden drop in confidence in the financial markets. Should the United States be unable to attract the capital it needs to fund the current account deficit, the dollar and equity markets would fall and interest rates would rise sharply. Although this dire scenario does not seem to be immediately looming, it remains a disturbing possibility.
Former Federal Reserve Chairman, Paul Volcker, has predicted there is a 75 per cent chance of such a crisis within the next five years. In such a case, the yield on ten-year treasuries could jump to 7–8 per cent, equity markets could fall by 25–30 per cent, and the dollar could depreciate by 15–20 per cent.
CONCLUSION Many of the economy’s underlying fundamentals are strong. This should allow structural deficits to be gradually unwound, and 3.0 per cent annual growth to be achieved. However, a serious housing market reversal or energy price rise could interact to produce a more severe slowdown, or even a recession, later in the year.
OUTLOOK FOR 2006
Chile’s Growth Outlook Remains Strong 2
Experts from Oxford Analytica, Oxford
he momentum from two years of high growth is expected to ensure a strong performance in 2006. In this context, given that the impact of the January elections was regarded as neutral, the main risk factors are Chile’s lack of a secure energy supply and relations with its neighbours. In 2005 the Chilean economy expanded by around 6 per cent, following growth of 6.1 per cent in 2004.
T
KEY INSIGHTS ➙ In 2006 consumer spending is likely to expand ahead of GDP while inflation remains under control. ➙ Non-mining exporters may become increasingly concerned that currency appreciation, attributed partly to high copper prices, is undermining their results. ➙ The result of January’s presidential run-off ballot will not have a significant effect on the economy. Initially, this high growth, which followed a threeyear slowdown, was driven by strong markets for Chile’s commodity exports, particularly copper. However, domestic demand has also strengthened, giving the economy a momentum that suggests growth of around 5.5 per cent in 2006. Investment. In 2005, investment, measured as gross fixed capital formation, has expanded by around 18.0 per cent, up from 12.7 per cent in 2004, and is expected to reach a record of nearly 28.0 per cent of GDP. Although, in 2006, investment is forecast to expand by less than GDP,
its high level over the last two years has substantially increased the potential for non-inflationary growth.
Chile: Investment % variation
as % of GDP
20
30
16
25
12
20
8
15
4
10
0
2000
2001
2002
2003
2004
2005e 2006f
5
Source: Chilean Finance Ministry
Consumer spending. In 2005, consumer spending is estimated to have increased by over 7 per cent and is expected to show a similar expansion in 2006, boosted by lower unemployment. In October 2005, the national unemployment rate was running at 8.1 per cent, down from 9.4 per cent in October 2004, and is expected to drop further in the coming months. Exports. In 2006, exports are forecast to reach around US$39 billion, similar to their level this year (while imports reach some US$33 billion, up from around US$30 billion this year). However, this export projection assumes that the price of copper, Chile’s main export, will drop to an average of approximately US$1.30 per pound in 2006, down from around US$1.65 this year. This forecast may be an underestimate in view of strong demand from China,
139
THE AMERICAS Chile: Copper prices and GDP GDP – % change, year-on-year (left axis) Annual average copper price – USD% (right axis) 7
1.8
6
1.5
5
1.2
4
0.9
3
0.6
2
0.3
1
2000
2001
2002
2003
2004
2005e 2006f
0
Source: Chilean Finance Ministry
weak international supply and low stocks. At present, copper is running at close to US$2.10 per pound. Economic policy. Given Chile's small open economy and dependence on commodity exports, one of its main challenges is to guard against potential imbalances arising from external factors: ●
●
140
Exchange rate policy. Although the peso floats against the dollar, the autonomous central bank can intervene in the event of unusually large fluctuations and is under increasing pressure to do so, following an important strengthening of the peso, attributed partly to the high price of copper. The exchange rate was around 510 pesos to the dollar end-2005, down from a midyear level of 590, and there is some concern that Chile could suffer from so-called ‘Dutch disease’, with high copper prices damaging the results of other export sectors. However, in real terms, the exchange rate remains below its level in the period of strong growth that preceded the Asian crisis. Moreover, the central bank has warned that, although intervention can smooth out short-term fluctuations, it is powerless against a trend that reflects underlying changes in economic conditions. Monetary policy. The central bank has gradually increased its reference overnight interest rate in a bid to keep inflation within its 2–4 per cent medium-term target range. The reference rate, currently running at an annual nominal 4.5 per cent, is expected to continue to increase gradually, possibly reaching around
●
5.75 per cent by end-2006. In November 2005, 12-monthly consumer price inflation was running at 3.6 per cent, and official and private forecasts suggest a rate of around 3.0 per cent in 2006 (although this will depend partly on the price of oil, for which Chile is almost exclusively dependent on imports). Fiscal policy. In line with the counter-cyclical fiscal policy introduced in 2000, the 2006 budget will mean an estimated surplus of 2.3 per cent of GDP, down from close to 4.0 per cent in 2005. Both candidates in the presidential run-off have indicated that they would maintain this policy, although the opposition candidate would gradually reduce the structural surplus to 0 per cent.
Political outlook. In the run-off presidential ballot on 15 January, Michelle Bachelet, of the centre-left government coalition, the Concertacion, gained victory against Sebastian Pinera, the more moderate of two conservative opposition candidates. Although Bachelet’s support dropped late 2005, she succeeded in taking 53.5 per cent of the vote in the second round ballot, while Pinera took 46.5 per cent. This victory gave Concertacion its fourth consecutive term. Bachelet is not likely to seek significant change in Chile’s free-market economic policies, its strategy of international integration as reflected in free trade agreements or its macroeconomic stability. Moreover, under a recent constitutional reform, the government’s period of office was reduced to four years, down from six, without the option of reelection, and this may prove rather short for a government to enact major reforms.
Chile: Composition of Congress, 2006–10 Number of seats Government Opposition Independent Senate Lower house
20 63
Source: Oxford Analytica
17 52
1 5
CHILE’S GROWTH OUTLOOK REMAINS STRONG Risk factors. Chile’s dependence on Argentine natural gas is likely to emerge as a key problem for the next government. Since mid-2004, Argentina has restricted gas sales to Chile as its own domestic demand has increased ahead of supply, affecting Chilean electricity generators and industrial gas users. Although power cuts have so far been avoided, they will be a risk in 2006, particularly if a dry winter were to limit hydroelectric output. A proposed regasification plant would allow Chile to import liquefied natural gas, diversifying its sources of supply, but would not come into operation for several years. Chile had also hoped that a proposed Southern Cone gas pipeline network would allow it to import gas from Peru, but this project seems unlikely to prosper in the short term. Moreover, in 2006, Chile may face renewed difficulties in its relations with both Peru and Bolivia (which has South America’s largest gas reserves after Venezuela): ●
Chile’s relations with Peru, which recently enacted a law that implies a unilateral expansion
●
of its territorial waters at the expense of Chile, will depend partly on the result of Peru’s April presidential election, as well as on the outcome of its request for the extradition of former president, Alberto Fujimori, imprisoned in Santiago since early November 2005. In recent months, Santiago has made significant efforts to improve relations and has announced a trade agreement that gives almost all Bolivian products tariff-free access to the Chilean market. However, the future of bilateral relations will depend crucially on the impact of the election of Evo Morales as Bolivian president on 18 December 2005.
2
CONCLUSION Although Chile faces a number of medium-term economic challenges, its growth outlook is positive for 2006 and, possibly, through to 2007. However, its prospects would eventually be damaged if its relations with its neighbours were to deteriorate and it became isolated within South America.
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The Range of Country @ratings in the Americas Sylvia Greisman and Pierre Paganelli Coface Country Risk and Economic Studies Department, Paris
COUNTRY @RATING SCALE
HIGHEST RISK
C B
Emerging Countries A4 A3
World A2
Industrialized Countries A1
CIS Subsaharan Africa
Latin America Near and Middle East
Central Europe Emerging Asia
European Union (15) Japan North America
LOWEST RISK
The regional country risk @rating represents an average of country @ratings weighted according to their contribution to the region’s production.
142
Country @ratings measure the average level of shortterm non-payment risk associated with companies in a particular country. They reflect the extent to which a country’s economic, financial and political outlook influences local companies’ financial commitments. They are, thus, complementary to @rating credit opinions on companies. In North America, risk quality has remained good. As expected, companies dealt very effectively with the growth slowdown in 2005. Payment risk nonetheless reached a low-point. Further moderation of growth should mark 2006. However, although economic activity has remained robust, high oil and raw material prices and intense competition have been squeezing company margins. Weaker players could thus experience difficulties notably in the car industry and air transport. Distribution, meanwhile, will continue to face stiff competition and flagging household demand.
In Latin America, despite a growth slowdown in 2005, company payment behaviour remained good with the financial situation generally better for export-oriented companies than for players focusing on the domestic market. The level of risk in the region has, however, been higher than the emerging country average due to the vulnerability of companies in a still shaky economic, financial and political environment. Some companies have nonetheless been thriving in a context of strong growth accompanied by tighter economic policies and rapid export development that has allowed them to reduce their financial vulnerability. However, the average level of public sector and foreign debt is still high. While remaining at satisfactory levels, growth should sag slightly in 2006, particularly with raw material and farm prices not quite as high as they have been recently. However, the year will be marked above all by the many important election dates with underlying political tensions continuing to build up in many countries. The conditions in which those elections are held and the capacity of the economies to withstand possible tensions will provide an indication of the solidity of their performance. Countries rated A1 A very stable political and economic situation has a favourable influence on generally good company payment behaviour. A satisfactory legal framework moreover ensures creditor protection and collection procedure effectiveness. That globally favourable environment does not, however, preclude either growth disparities or occasional payment defaults.
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THE RANGE OF COUNTRY @RATINGS IN THE AMERICAS United States: Economic growth and credit risk 300
7% 6% 5% 4% 3% 2% 1% 0%
250 200 150 100 50 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Economic growth
Payment incident index
prices not being as high as they have been recently. Investment and commodity exports will remain the primary growth engines, stimulated by numerous free trade agreements. Fiscal policy should remain strict with foreign debt ratios continuing to decline. Meanwhile, the outcome of the January 2006 presidential election will not jeopardize economic policy continuity or progress on reforms. In that context, company solvency should remain good and payment experience satisfactory.
Latin America: Economic growth and credit risk 7%
300
6%
250
5%
200
4%
150
3%
100
2%
50
1% 0%
1997 1998 1999 2000 2001 2002 2003 2004 2005e 2006f Economic growth
0
Payment incident indices
In the United States, economic activity will remain dynamic in 2006 despite a gradual slowdown. While continuing to grow at a good rate, household consumption will sag as the property market cools down. Exports will continue to surge, benefiting from more robust economic conditions in Europe and Japan. Their rapid growth will not, however, keep the current account deficit from widening further. Investment will continue to increase, buoyed by reconstruction spending by states on the Gulf of Mexico, and equipment purchases by mining and extractive industries. The company financial situation should stabilize at a good level despite increased pressure on margins and the higher cost of financing, provided, however, that potential risks, notably in the property market, remain under control. Countries rated A2 Default probability is still weak even in the case when one country’s political and economic environment or the payment record of companies is not as good as in A1-rated countries. In Chile, growth should remain dynamic despite a slight downturn attributable to a less propitious international environment and copper
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2
Countries rated A4 An already patchy payment record could be further worsened by a deteriorating political and economic environment. Nevertheless, the probability of a default is still acceptable. In Mexico, after the economic slowdown in 2005, recovery is expected in 2006 due notably to easing monetary policy. Uncertainties surrounding the presidential and legislative elections scheduled for July 2006 could affect domestic demand, while demand from the United States, on which Mexico is very dependent, could be slightly less dynamic. Moreover, some sectors, like textiles, since the dismantling of quotas early 2005, continue to struggle to compete with China. In that framework, lengthening payment times have marked company payment behaviour.
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Countries rated B An unsteady political and economic environment is likely to affect further an already poor payment record. In Brazil, after the second-half slowdown in 2005, a slight growth recovery should develop in 2006 with private consumption resuming its role as the main economic engine. The easing of inflation, meanwhile, will allow interest rates to drop further. Dynamic exports have been generating trade and current account surpluses amid improvement in foreign debt ratios. Meanwhile, although the political crisis gripping Brazil since June 2005 has weakened President Lula, it has apparently not affected either economic performance or financial market confidence with economic policy continuity essentially assured. In that context, companies have been enjoying better cash positions. With interest
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143
THE AMERICAS rates still high, however, they have nonetheless been exerting pressure on suppliers, which could result in the possible lengthening of payment times. In Colombia, growth should slow slightly, underpinned mainly by domestic demand with exports making a more modest contribution. Despite greater fiscal orthodoxy, substantial tax reform will be necessary to reduce still-high public
sector debt. External accounts will deteriorate slightly with the debt service burden remaining relatively heavy. Although President Alvaro Uribe has a good chance of being re-elected in May 2006, the institutional weaknesses and the climate of insecurity could persist. Payment experience should nonetheless remain satisfactory with companies honouring their commitments in a timely manner.
COFACE MAP OF COUNTRY @RATINGS
144
THE RANGE OF COUNTRY @RATINGS IN THE AMERICAS In Peru, after a robust expansion in 2005, growth should sag, although still buoyed by exports and strong domestic demand. Government authorities have been pursuing prudent fiscal policy with IMF backing. Amid an ongoing external account recovery, foreign debt ratios have continued to improve with Peru making early repayment to Paris Club creditors in 2005.
The country is nonetheless still exposed to a downturn in world raw material prices, and the banking system has remained weakened by the extent of dollar-denominated deposits and loans. The currently relatively strict economic policy should not change fundamentally after the April 2006 presidential and legislative elections.
COFACE MAP OF MEDIUM- AND LONG-TERM COUNTRY RISK
2
145
THE AMERICAS Countries rated C A very unsteady political and economic environment could deteriorate an already bad payment record. In Argentina, with its rating upgraded in 2005, company solvency continued to improve despite a moderate growth slowdown. A weak peso and strong world demand, particularly for farm products, have benefited exporters, allowing them to increase their margins despite renewed inflationary pressures. Domestically oriented companies, however, have had more difficulty passing on production cost increases in their sales prices. After the catch-up phase registered these past three years, the economic slowdown should continue in 2006 with the uncertainties surrounding the regulatory and legal framework deterring investment. The public sector financial situation has remained precarious despite primary surpluses and the June 2005 restructuring of bond debt, which also made it possible to reduce foreign debt. Debt ratios are still high despite early repayment of the IMF end-2005. In Ecuador, the political situation has been shaky since the president’s removal from office in April 2005, the subsequent August strikes and the pending the presidential election in October 2006. This climate has affected household and investor confidence and slowed economic activity despite favourable oil market conditions. Interim president, Alfredo Palacio, has demonstrated his commitment to increasing social spending at the expense of debt repayment, and to renegotiate the formula for sharing oil resources with international companies. The improvement in public sector finances and external debt ratios could thus stall. Moreover, the political instability and weak institutional and legal environment have deterred local and foreign investors.
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146
In Venezuela, with the prospect of continued high oil prices in 2006, public spending and use of the PDVSA national oil company’s surplus foreign currency earnings (via the FONDEN national development fund) will continue to underpin growth. The very liquid market has been generating inflationary pressures nonetheless moderated by subsidized prices and a reduced VAT rate. The external financial situation has remained comfortable. Although exchange controls are still in force to stem capital flight, importers have benefited from special access to foreign currency. Although companies have been benefiting at this juncture from buoyant economic conditions conducive to better payment behaviour, the business climate has remained unpredictable. Countries rated D The high risk profile of a country’s economic and political environment will further worsen a generally very bad payment record. In Bolivia, Evo Morales was elected endDecember 2005 on a platform notably focused on hydrocarbon nationalization and free coca cultivation. The new president will have to weigh the social aspirations of Indian movements against the interests of foreign companies, which Bolivia needs to exploit its large gas reserves, amid a separatist risk in the Santa Cruz region where the reserves are located. In that context, growth could slow in 2006 since the political climate could affect domestic demand or even the export sector. The country has, moreover, remained financially shaky with high foreign debt.
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ARGENTINA
Argentina Population (million inhabitants) GDP (US$ million)
38.4 153,130
2
Short-term: C
Coface analysis
Medium-term: Very high risk
STRENGTHS ● Endowed with abundant mineral and agricultural resources, the country has benefited from the strong world demand and high raw material prices. ● The undervalued peso has been bolstering local production in the face of foreign competition, while making Argentina’s products more competitive within Mercosur. ● The work force is skilled. ● The levels of education and human development indicators have remained substantially above the Latin American average.
RISK ASSESSMENT After three catch-up years, an economic slowdown should be perceptible in 2006, due notably to a consumption downturn and a lack of investment amid a resurgence of inflationary pressures. The public sector financial situation is still shaky despite the generation of comfortable primary surpluses and the favourable restructuring of Argentina’s bond debt obtained in June 2005. Although that restructuring also allowed the country to substantially reduce its foreign debt burden, it still has very high debt ratios. This is despite early repayment end-2005 of its debt to the IMF, with which its commitments only represented
WEAKNESSES The economy is still dependent on raw materials and continues to suffer from a lack of investment, notably in the energy sector. ● Despite a favourable exchange of bond debt, the public sector financial situation has remained shaky amid very high external debt ratios. ● Government authorities have little fiscal leeway and must imperatively reach a sharing agreement with the provinces. ● The banking sector is still weak and undercapitalized, despite modest improvement. ● President Kirchner’s popularity notwithstanding, the political situation has remained shaky due to dissension within the governing party and social tensions. ●
a small fraction of the total debt. That repayment, moreover, had the effect of tapping foreign currency reserves, which had grown, however, thanks to large trade surpluses and capital repatriation. Meanwhile, modest improvement notwithstanding, the banking sector has remained weak. The run-up to presidential elections in 2007 along with the decision to no longer call on IMF assistance seem hardly conducive to progress on structural reforms, notably those concerning the business environment, pricing adjustments for privatized public services and the financial system. In that context, there has been a gradual resumption of business-to-business credit with the
147
THE AMERICAS MAIN ECONOMIC INDICATORS US$ billions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2001
2002
2003
2004
2005(e) 2006(f )
-4.4 -1.5 -3.3 26.5 19.2 7.4 -3.4 -1.3 61.2 50.1
-10.9 41.0 -1.9 25.7 8.5 17.2 8.7 8.5 156.9 82.9
8.8 3.7 0.7 29.6 13.1 16.4 7.7 5.9 128.0 70.9
9.0 6.1 3.4 34.6 22.4 12.1 2.2 1.4 111.7 46.1
8.6 11.0 1.8 37.2 27.5 9.7 1.9 1.0 73.0 34.2
5.5 11.0 1.5 40.0 33.0 7.0 -2.3 -1.1 61.4 34.0
4.3
5.3
5.7
5.5
6.8
6.3
e = estimate, f = forecast
financial health of export-oriented companies better than that of companies focusing on the domestic market. Subsidiaries of foreign
companies have been more cautious, however, due notably to uncertainties concerning the legal and judicial framework.
CONDITIONS OF ACCESS TO THE MARKET
Despite its attractiveness, the Argentine market should be approached with caution.
Market overview Between 1998 and 2002, Argentina suffered a severe economic crisis that saw the country default on its debt, withdraw from the currency board, devalue the peso by a massive 70 per cent and struggle to come to terms with a banking sector in total disarray. In fact, so great was the risk of collapse of the banking system that the government was forced to introduce exchange controls, which have since been relaxed. Foreign trade transactions are regulated in a number of ways. Exporters are required to convert their foreign currency export earnings on the Argentine currency market within a period of 60–360 days and place the converted funds with a local bank. Under regulations introduced by the Argentine central bank in June 2005, imports of certain consumer goods (mainly those covered by chapters 03, 15, 84 and 87) have to be paid for in advance or against documents prior to shipment from the country of origin. This rule was slightly relaxed in July 2005 to allow for the use of 30-day supplier credit.
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148
Means of entry Argentina has been a member of the WTO since 1995 and party to numerous trade agreements. It is also a member of Mercosur. While the founding treaty of Mercosur enshrines the principle of free movement of goods, the four member countries (five with the accession of Venezuela in November 2005) maintain customs barriers for certain products that they have undertaken, gradually, to lift. Since January 1995, goods from non-Mercosur countries have been subject to the common external tariff, which ranges from 0 per cent to 28 per cent (average 11 per cent). In addition, imports are liable to 21 per cent VAT (CIF value + customs duties), which varies according to the product and service. There are specific indirect duties on certain products (cigarettes, wines and spirits, luxury goods, vehicles) and a financial transactions tax (cheque tax). Products such as shoes, textiles and toys are subject to regulatory restrictions (import licences).
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ARGENTINA Attitude towards foreign investors The legal framework for foreign investment in Argentina appears to be very liberal. Decree 1853/93 defines the rules governing investment and lays down the principles of equal treatment of domestic and foreign investors and free repatriation of capital and profits. Foreigners may invest – on the same terms as local investors – in virtually every branch of the economy without seeking prior approval. The stability of the legal and tax system, however, cannot aways be taken for granted. Some
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31 companies have filed suits before ICSID, the World Bank’s arbitration board, for breach of obligations by the Argentine government; only one has, so far, withdrawn its action. The economic and financial emergency, in force since 2002, has been extended until December 2005. It should also be noted that the new Justice Inspectorate (IGJ), which runs the trade register, has made administrative formalities for companies more complicated, especially as regards share ownership, directorships etc.
2
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 800 700
WORLD Argentina
600 500 400 300 200 100
ec -9 4 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 9 D 7 ec -9 Ju 7 ne 9 D 8 ec Ju 98 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 0 D 1 ec Ju 01 ne 0 D 2 ec Ju 02 ne 0 D 3 ec -0 Ju 3 ne 0 D 4 ec Ju 04 ne 0 D 5 ec -0 5 Ju
3 94 ne
D
-9
ec
Ju
D
Ju
ne
93
0
149
THE AMERICAS OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 55 ■ Public consumption 10 ■ Investment 13
Exports: 25% of GDP
Imports: 14% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
5000
5000
4000
4000
3000
3000
2000
2000
1000
1000
0
0 Brazil
Chile
USA
China
Spain
Brazil
USA
Germany
China
Italy
IMPORTS by products ■ All food items 5% ■ Fuels 5% ■ Chemical products 31% ■ Other manufactured goods 20% ■ Capital goods and transport equipment 31% ■ Miscellaneous 8%
EXPORTS by products ■ All food items 46% ■ Fuels 17% ■ Chemical products 8% ■ Other manufactured goods 12% ■ Capital goods and transport equipment 11% ■ Miscellaneous 7%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
150
Argentina 11,410 3,810 0.863 38.9 89 27.3 219 82
Regional average DC average 7,130 3,280 0.795 44 77 31 170 67
4,300 1,280 0.697 33 43 31 112 28.4
BOLIVIA
Bolivia Population (million inhabitants) GDP (US$ million)
8.8 8,476
2
Short-term: D
Coface analysis
Medium-term: Very high risk
STRENGTHS ● Bolivia boasts abundant hydrocarbon resources and substantial mineral wealth. ● Association with Mercosur has facilitated exports to the country’s two large neighbours, Brazil and Argentina. ● Public creditors have accorded concessional treatment to Bolivia’s foreign debt.
RISK ASSESSMENT Evo Morales, leader of the MAS Movement Toward Socialism, was elected end-December 2005 on a platform focused on nationalization of hydrocarbon resources, free coca cultivation and constitutional reform. That will hardly be likely to ease internal or external tensions. The outcome of that election, held after a series of resignations, may not put an end to political uncertainty especially with the new president one seat short of a parliamentary majority. The president will notably have to arbitrate between the social aspirations of the Indian movements responsible for his election, very divided themselves, and the interests of foreign companies, which Bolivia will need in exploiting the continent’s largest gas reserves after those of Venezuela. Furthermore, the wide gap between the poor Indian
WEAKNESSES Suffering from its landlocked status and ethnic, regional and social divisions, Bolivia has remained one of Latin America’s least developed countries. ● Exports have involved a limited number of staple commodities with natural gas, soybeans and zinc generating half of sales abroad and coca cultivation, moreover, continuing to pose a particular problem. ● Despite reductions granted under the HIPC programme, debt ratios have remained high. ● The banking sector’s extensive dollarization will continue to be a major source of vulnerability if a crisis of confidence develops. ● The political, social and business climates have remained very shaky. ●
masses and a better-off, non-indigenous, minority has marked Bolivian society with a separatist risk existing in the eastern Santa Cruz region where the gas reserves are located. Although the new president has inherited an improved economic situation with relatively strong growth, economic activity should sag in 2006. The political climate could affect not only domestic demand but also the export sector, which will also suffer from a less-buoyant international environment. Moreover, despite a continuing external account surplus, the country has remained financially shaky with high foreign debt. Finally, considering the new government’s political options, its relations with creditors, international financial institutions and foreign investors could become more strained.
151
THE AMERICAS MAIN ECONOMIC INDICATORS US$ billions Economic growth (%) Inflation (%) Public balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2005(e) 2006(f )
2001
2002
2003
2004
1.7 0.9 -6.9 1.3 1.7 -0.4 -0.3 -3.4 57.6 28.1
2.4 2.4 -8.9 1.3 1.8 -0.5 -0.3 -4.1 61.6 22.4
2.8 3.3 -8.1 1.6 1.6 -0.04 0.05 0.6 65.8 25.3
3.6 4.4 -5.7 2.1 1.8 0.3 0.3 3.2 70.0 18.1
3.5 5.1 -5.0 2.5 2.3 0.2 0.2 2.1 66.5 15.8
3.0 4.2 -4.0 2.7 2.5 0.2 0.2 1.5 64.1 16.0
6.5
5.0
5.6
5.8
6.8
7.8
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview A small landlocked state surrounded by powerful neighbours, Bolivia attached great importance in the 1990s to open borders and trade integration with the other countries of the region. A five-tier Common External Tariff of the Andean Community of Nations (ACN) (0, 5, 10, 15 and 20 per cent) has been in force in the country since 1995. The other ACN members allow Bolivia to apply de facto 10 per cent flat-rate ad valorem customs duty on all imports from non-ACN countries, excluding some capital goods, which are liable to a reduced rate of duty. FDI has fallen since 2000, due partly to the completion of the investment programme for capitalized companies and partly to escalating social and political strife. Bolivian unskilled labour is plentiful and cheap. Wages can be fairly high for positions of responsibility. Employment of foreign staff is, in principle, limited to 15 per cent of a company’s workforce.
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Means of entry Foodstuffs as well as crop and animal products require health certificates complying with the standards laid down by the ACN and approved by Bolivia. The national agency, Senasag, is responsible for administering all health standards in
respect of imports. All imports are subject to random inspections by Bolivian customs. The growth in parallel markets is causing concern among legal traders. Documentary credit is the most widely used means of payment for both cash and deferred settlements. Delivery against payment is also used, but is far less widespread. Where business relations are well established, payments are usually made by bank transfer. Corporate defaults have surged since 2000. Against this background, irrevocable and confirmed documentary credit is strongly recommended if there is any doubt whatsoever about the buyer’s creditworthiness. Attitude towards foreign investors Until October 2003, foreign investment was granted the same terms as investment by Bolivian nationals. Today, there are an increasing number of complaints against the latter. Moreover, mounting industrial unrest through the first half of 2005 has weakened Bolivia’s institutions, created an alarming climate of political instability and acted as a deterrent to foreign investment.
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152
Foreign exchange regulations There are no foreign exchange controls and no restrictions on the buying and selling of currency or capital transfers. Bolivia is a highly dollarized economy. However, in July 2004 the government
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BOLIVIA introduced a 0.3 per cent two-year tax on bank transfers of foreign currency in excess of US$1,000. In an attempt to avoid the tax, people simply moved most of their dollar holdings into local currency
accounts. Companies, on the other hand, have kept their accounts in dollars. At end-2004, over 88 per cent of corporate bank deposits were denominated in dollars.
OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 59 ■ Public consumption 14 ■ Investment 9
2
Exports: 24% of GDP
Imports: 25% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
600
500
500
400
400
300
300 200
200
100
100
0
0 Brazil
Venezuela Colombia
USA
Peru
Brazil
Argentina
USA
Chile
Peru
IMPORTS by products ■ All food items 13% ■ Fuels 7% ■ Chemical products 18% ■ Other manufactured goods 27% ■ Capital goods and transport equipment 32% ■ Miscellaneous 3%
EXPORTS by products ■ All food items 30% ■ Fuels 30% ■ Ores and metals 18% ■ Manufactured goods 16% ■ Miscellaneous 6%
STANDARD OF LIVING / PURCHASING POWER Indicators
Bolivia
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
2,490 900 0.687 32 64 38.4 72 22.8
Regional average DC average 7,130 3,280 0.795 44 77 31 170 67
4,300 1,280 0.697 33 43 31 112 28.4
153
THE AMERICAS
Brazil Population (million inhabitants) GDP (US$ million)
179.2 604,800
Short-term: B
Coface analysis
Medium-term: Moderately high risk
STRENGTHS ● Brazil boasts abundant and varied natural resources, with a relatively diversified economy. ● Manufactured products represent an increasingly large proportion of production and exports. ● Fiscal and monetary policies have been pragmatic. ● The improvement in external financial ratios has been significant. ● The domestic market’s potential and low labour costs have been attractive assets for foreign investors.
154
RISK ASSESSMENT After sagging in 2005, economic growth should recover slightly in 2006 with private consumption resuming its role as main economic driver. Concurrently, declining inflation will allow interest rates to ease. In that context, company cash positions have improved. With interest rates still high, however, companies have been exerting increased pressure on their suppliers, which could lead to longer payment times. A lack of investment has resulted in deficient infrastructure. However, with public sector debt still too high and too exposed to interest rate variations, the financing for such spending has not been available. Moreover, even with competitive and dynamic exports generating trade and current account
WEAKNESSES Public sector debt has remained high, vulnerable to interest rate variations, and its maturity is still too short. ● The levels of debt and external financing needs have remained substantial. ● The low level of domestic savings, mainly absorbed by the government’s financing needs, has limited the investment capacity of private companies. ● High domestic interest rates have also been a deterrent to investment. ● The president has little room for manoeuvre, having to compromise with a parliamentary coalition while taking public aspirations and economic constraints into consideration. ●
surpluses, external financing needs, although easily met, have remained substantial due largely to the debt service burden, with the country thus remaining dependent on international financial markets. Brazil’s external vulnerability has nonetheless eased with its external debt ratios declining sharply. Full early repayment of its debt to the IMF end-2005 as well as to Paris Club creditors in January 2006 will further improve the situation, although these commitments only represent a small fraction of the total debt. In any event, the political crisis that has gripped Brazil since June 2005 has not seemed to affect either economic performance or financial market confidence, with economic policy continuity essentially assured. That crisis has nonetheless weakened President Lula da Silva and will thus hamper efforts on reform.
BRAZIL MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ billions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
1.3 9.4 -3.6 58.2 55.6 2.6 -23.2 -4.6 44.7 88.8
1.9 14.7 -4.6 60.4 47.2 13.1 -7.7 -1.7 49.6 63.6
0.5 10.4 -5.1 73.1 48.3 24.8 4.2 0.8 46.6 68.4
4.9 6.1 -2.7 96.5 62.8 33.7 11.6 1.9 36.4 48.4
2.5 5.3 -2.6 118.5 78.1 40.4 12.9 1.7 26.6 37.2
3.5 4.7 -2.6 126.8 92.8 34.0 5.2 0.7 25.3 32.9
4.5
5.4
6.9
6.1
5.7
5.4
2
e = estimate, f = forecast
Market overview Brazil’s working population, according to the latest official figures published in 2003, is estimated at 88 million out of a total of 143 million persons over 10 years old, ie an activity rate of 61.5 per cent. The minimum monthly wage is currently BRL300 (about €110). Employer social security and compulsory contributions amount to about 50 per cent of gross wages. Pension and tax reforms could lead to lower contributions mainly for the export sector.
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Means of entry The average rate of customs duty is approximately 10.7 per cent and the top rate 35 per cent. The country is bound by Mercosur’s Common External Tariff, which is subject to numerous exceptions. Brazil maintains a number of non-tariff barriers to imports, including import licences, customs valuations and inspections and prior product registration. The most widely used means of payment are down payments, pre-payments, cash against documents, acceptance bills and irrevocable letters of credit confirmed by a Brazilian or foreign bank. Restrictions are placed on the employment of foreigners. There are two types of work permit – permanent and temporary – both of which are
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awarded on a fairly restricted basis. One of the criteria for obtaining a permanent visa is investing a minimum of US$50,000 in the country. Attitude towards foreign investors Foreign investors have to register with the central bank and declare the amount, source and purpose of investment. All companies and individuals not domiciled in Brazil who hold or wish to acquire property in the country must register with the CNPJ (companies register) or the CPF (natural persons register). Foreign investment is banned in certain sectors. Shareholdings in financial institutions are subject to government approval. Foreign investors can set up a wholly-owned subsidiary without being subject to legal restrictions of any kind. However, they cannot hold directorships in a Brazilian subsidiary without a permanent work permit. Moreover, they must be represented by a lawyer.
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PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
250
WORLD Brazil
200
150
100
50
0
Ju ne 9 D 3 ec Ju 93 ne 9 D 4 ec Ju 94 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 97 D ec Ju 97 ne 9 D 8 ec Ju 98 ne 99 D ec Ju 99 ne 0 D 0 ec -0 Ju 0 ne 0 D 1 ec Ju 01 ne 02 D ec Ju 02 ne 0 D 3 ec Ju 03 ne 04 D ec Ju 04 ne 0 D 5 ec -0 5
CONDITIONS OF ACCESS TO THE MARKET
155
THE AMERICAS Overseas transfers (capital repatriation, reinvestment, profit and dividend repatriation) are authorized provided the capital is registered. Apart from requiring central bank permission, such transfers have to be handled by financial institutions trading on the currency market. Profit and dividend transfers are not taxed.
Foreign exchange regulations The new government formed after the October 2002 elections has honoured its pledge to maintain the flexible exchange rate system introduced in 1999. The central bank intervenes only occasionally, when required, to ensure liquidity in the market, but not to shift rates. Its sole aim is to control inflation in a manner that does not undermine growth.
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OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 52 ■ Public consumption 17 ■ Investment 16
Exports: 17% of GDP
Imports: 13% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
12000
20000
10000 15000
8000 6000
10000
4000
5000
2000 0
0 USA
Argentina
China Netherlands Germany
USA
Argentina Germany
Japan
China
IMPORTS by products ■ All food items 7% ■ Fuels 16% ■ Chemical products 21% ■ Other manufactured goods 14% ■ Capital goods and transport equipment 37% ■ Miscellaneous 5%
EXPORTS by products ■ All food items 29% ■ Agricultural raw materials 5% ■ Fuels 5% ■ Ores and metals 9% ■ Chemical products 6% ■ Other manufactured goods 22% ■ Capital goods and transport equipment 23% ■ Miscellaneous 2%
STANDARD OF LIVING / PURCHASING POWER
156
Indicators
Brazil
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
7,510 2,720 0.792 46.9 83 27.5 223 74.8
Regional average DC average 7,130 3,280 0.795 44 77 31 170 67
4,300 1,280 0.697 33 43 31 112 28.4
CANADA
Canada Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
31.9 976,700 30,618
2 Coface analysis
Short-term: A1
RISK ASSESSMENT In 2005, economic growth remained dynamic, still buoyed by consumption and investment. Increases in earned income and employment, appreciation of property assets and low interest rates spurred household consumption. Company investment benefited from the decline of import prices as well as a net increase in profitability and saturation of production capacity in the mining and extractive industries. Conversely, manufactured product exports suffered from the Canadian dollar’s appreciation. Growth should remain dynamic in 2006. Despite the rapid rise of interest rates and slower growth of earnings and employment, private investment and consumption will only dip slightly thanks to continuation of stimulatory fiscal policy made possible by the public sector’s surplus financial position.
Public spending on health, research, education, industrial restructuring and infrastructure will continue to rise. Although the Canadian dollar will remain firm, traditional exports will benefit from the upward world demand trend, while raw material and energy exports will benefit further from high prices. Despite a satisfactory Coface payment incident index and the decline of bankruptcies (down 6 per cent in 2005), incidents have occurred sporadically. They reflect the dichotomy between the booming provinces mainly located in the west and the rest of the country. They also reflect the dichotomy between the mining and extractive industries, benefiting from soaring prices, and manufacturing industries (the car industry, wood, paper, furniture), suffering from limited productivity gains, unfavourable exchange rates and rising raw material and energy costs.
MAIN ECONOMIC INDICATORS % Economic growth Consumption (var.) Investment (var.) Inflation Unemployment rate Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)
2001
2002
2003
2004
1.8 2.3 0.2 2.5 7.2 4.0 0.7 81.0 -2.8 -5.0 2.3
3.1 3.7 -4.9 2.2 7.6 2.6 -0.1 77.8 1.1 1.4 2.0
2.0 3.1 6.1 2.8 7.6 3.0 0.0 73.3 -2.4 3.8 1.5
2.9 3.4 6.1 1.8 7.2 2.3 0.7 71.0 5.0 8.1 2.2
2005(e) 2006(f ) 3.0 4.0 7.8 2.3 6.7 2.7 1.2 68.0 3.0 7.1 1.8
3.1 3.3 5.5 2.4 6.5 4.0 0.9 66.0 5.5 4.5 2.4
157 e = estimate, f = forecast
THE AMERICAS PAYMENT AND COLLECTION PRACTICES A heritage of Canada’s colonial past, its dual legal system comprises that used by nine of the ten provinces making up the federal state, which is inspired by British ‘Common Law’ and that used by Quebec whose legal traditions are based on the codified principles of the Napoleonic code. Lower Canada’s civil code, dating to 1 August 1866, was completely revised and implemented on 1 January 1994 as the Quebec Civil Code. Under the British North America Act of 29 March 1867, Canada was the first British colony to exercise executive and legislative powers as a federal state. The Confederation of Canada came into effect as a dominion on 1 July 1867. Payment A single law governs bills of exchange, promissory notes and cheques throughout Canada, however this law is frequently interpreted according to common law precedents in the nine provinces or according to the civil code in Quebec. As such, sellers are well advised to accept such payment methods except where long-term commercial relations, based on mutual trust, have been established with buyers. Centralized accounts, which greatly simplify the settlement process by centralizing settlement procedures between locally based buyers and sellers, are also used within Canada. SWIFT bank transfers are the most commonly used payment method for international transactions. The majority of Canadian banks are connected to the SWIFT network, offering a rapid, reliable and cost-effective means of payment, notwithstanding the fact that payment is dependent upon the client being in good faith insofar as only the issuer takes the decision to order payment. The letter of credit (L/C) is also frequently used.
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Debt collection Canada’s constitution divides judicial authority between the federal and provincial governments. Thus, each province is responsible for administering justice, organizing provincial courts and enacting the rules of civil proceedings in its territory. Although
■
158
the names of courts vary between provinces, the same legal system applies throughout the country, bar Quebec. Within each province, provincial courts hear most disputes of all kinds concerning small claims, and superior courts hear large claims – for example, the Quebec superior court hears civil and commercial disputes exceeding C$70,000 and jury trials of criminal cases. Canadian superior courts comprise two distinct divisions: a court of first instance and a court of appeal. At federal level, the Supreme Court of Canada, in Ottawa, and only with leave of the Court itself (leave is granted if the case raises an important question of law), hears appeals against decisions handed down by the provincial appeal courts, or by the Canadian Federal Court (stating in appeal division), which has special jurisdiction in matters concerning maritime law, immigration, customs and excise, intellectual property, disputes between provinces and so on. The right of final recourse before the Privy Council, in London, was abolished in 1949. The collection process begins with the issuance of a final notice, or ‘seven-day letter’, reminding the debtor of his or her obligation to pay, together with any contractually agreed interest penalties. Ordinary legal action – even if the vocabulary used to describe it may vary within the country – proceeds in three phases: first, the writ of summons whereby the plaintiff files his or her claim against the defendant with the court; then the examination for discovery, which outlines the claim against the defendant and takes into account the evidence to be submitted by each party to the court; and, finally, the trial proper during which the judge hears the adverse parties and their respective witnesses, who are subject to examination and cross-examination by their respective legal counsels, to clarify the facts of the case before making a ruling. The Quebec civil code reform, in effect since 1 January 2003, is intended to speed up and foster, by devolving a broader role on the court, smoother court proceedings, by, for example, instituting a standard ‘originating petition’ (requête introductive d’instance), introducing a 180-day time limit by
CANADA which the proceedings must be scheduled for ‘investigation and hearings’ (pour enquête et
audition) and encouraging the parties to submit to conciliation procedures during legal proceedings.
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Canada
250
2
200
150
100
50
ec -9 4 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 9 D 7 ec Ju 97 ne 9 D 8 ec -9 Ju 8 ne 9 D 9 ec Ju 99 ne 0 D 0 ec -0 Ju 0 ne 0 D 1 ec Ju 01 ne 0 D 2 ec -0 Ju 2 ne 0 D 3 ec Ju 03 ne 0 D 4 ec -0 Ju 4 ne 0 D 5 ec -0 5 Ju
3 94 ne
Ju
D
-9
ec D
Ju
ne
93
0
159
THE AMERICAS
Chile Population (million inhabitants) GDP (US$ million)
16 94,130
Short-term: A2
Coface analysis
Medium-term: Low risk
STRENGTHS ● Chile boasts abundant resources – minerals (copper), farming, fish breeding, forestry– and competitive advantages on production. ● The economy has benefited from reforms implemented over the past 20 years with a consensus existing on economic policy options. ● The several free trade agreements in force have contributed to making the country one of the most open in the region and have allowed it to diversify its exports. ● Political stability, tight macroeconomic management and the quality of Chile’s infrastructure and financial system have encouraged foreign investors to set up operations and spurred the country’s development as a regional trade platform.
160
RISK ASSESSMENT Economic growth, although still dynamic, will nonetheless undergo a slight decline amid a less propitious international environment and lower copper prices. Investment, buoyed by a climate of confidence, and exports, still underpinned by commodities, will continue to be the main economic drivers. In that context, payment experience has been very satisfactory and company solvency should remain good. Strict rules on fiscal surpluses set several years ago have made it possible to sharply reduce public sector debt (below 10 per cent of GDP). Meanwhile, exports of agricultural, piscicultural and forestry products, stimulated by the many free trade
WEAKNESSES The economy has remained too dependent on copper exports (45 per cent of total sales abroad in 2004) and low value-added sectors. ● Chile is very dependent on imports to cover its energy needs, particularly gas from Argentina. ● The financial flows resulting from the extensive presence of foreign investors have weighed on current account balances. ● Severe income inequality has persisted due notably to disparities in the education system. ●
agreements in force, will offset a slight decline in copper sales, which have nonetheless continued to dominate foreign trade. Although profit repatriation by foreign companies will moderately strain current account balances, financing needs will remain reasonable and largely covered by foreign investment with external debt ratios continuing to decline. Lastly, the election of the country’s new president, Michelle Bachelet (from a centre-left coalition in power since 1990), during the second round of ballots in January 2006, should facilitate economic policy continuity and allow the government to make additional progress on reforms intended to improve the education, health and pension systems; labour market; and public administration.
CHILE MAIN ECONOMIC INDICATORS US$ billions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2005(e) 2006(f )
2001
2002
2003
2004
3.4 2.6 -0.5 18.3 16.4 1.8 -1.1 -1.6 56.2 17.7
2.2 2.8 -1.2 18.2 15.8 2.4 -0.6 -0.9 60.5 17.0
3.3 1.1 -0.4 21.5 18.0 3.5 -1.1 -1.5 59.2 17.0
6.1 2.4 2.2 32.0 23.0 9.0 1.4 1.5 46.4 14.9
6.0 3.8 2.9 39.1 29.5 9.5 0.7 0.6 38.1 14.3
5.5 3.7 2.0 40.7 32.4 8.3 -0.3 -0.2 35.8 13.3
6.8
7.4
6.5
4.9
4.0
4.0
2
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview The Chilean market is safe and stable. The country’s sound political and economic situation, good infrastructure and stable legislative and regulatory framework create an attractive business environment, especially for small and medium-sized companies. Chile has limited tariff protection and pursues unilateral measures to cut import duties, backed by bilateral and regional trade agreements. From 1 January 2003, standard customs duty on all products is 6 per cent. Moreover, ratification by Chile’s parliament of the free trade agreement with the EU, in force since 1 February 2003, has led to the abolition of customs duties on 99.8 per cent of industrial goods.
ground-breaking law will provide better industrial and intellectual property protection.
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Means of entry There are few non-tariff barriers. For food products, however, a number of non-tariff barriers are in place, including type approval and sampling procedures. Compared with other countries of the region, Chile offers adequate overall intellectual property rights protection. The new industrial property act (number 19.996) was published in March 2005. It supplements the 1991 act and enables Chile to bring its domestic legislation into line with the WTO’s TRIPS arrangements. With enactment legislation due to be passed in late 2005, this
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Attitude towards foreign investors There is equal treatment of foreign and local investors. Foreigners are not required to tie up with a local partner. Foreign investment status within the meaning of Decree-Law 600 applies to deals in excess of US$5 million. Capital inflows below this figure but above US$10,000 must be declared to the central bank. Some regulations have been relaxed though; abolition of the one-year lock-in period for capital having entered the country after 2000; scrapping of the compulsory reserve requirement (Encaje) etc. The utilities privatization and concession programme continues to offer foreign investors start-up opportunities despite the fact that most of the lucrative concessions have already been awarded. Corporation tax is 17 per cent, but there is a 20 per cent surtax on profits repatriated abroad (up to 35 per cent for some services). Moreover, some regions benefit from investment incentives (VAT exemption etc) under regional development aid programmes. Labour legislation is not burdensome in terms of social security contributions. Employer social security contributions are extremely low and limited to industrial accident protection, despite the introduction of unemployment benefits in 2002 and the increase in severance pay under the recently revised labour legislation.
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161
THE AMERICAS Since 2002, the government has been looking to provide incentives for foreign start-ups in the country. One such initiative is the Investment Platform Act 2002, which aims to turn Chile into a regional investment hub. Provided they meet a number of strict criteria, foreign companies investing from Chile in neighbouring countries are exempt from tax on profits generated outside. Since 1994, French investment is covered by the Franco–Chilean reciprocal investment protection
agreement. A double taxation agreement was signed between the two countries on 7 June 2004, pending ratification by their respective parliaments. Foreign exchange regulations The central bank abandoned the peso’s crawling peg in September 1999. The exchange rate has since been determined by the market alone, with the monetary authorities only intervening on an exceptional basis. All common means of payment are used.
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PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Chile
250
200
150
100
50
162
ec -9 4 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 9 D 7 ec Ju 97 ne 9 D 8 ec -9 Ju 8 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 0 D 1 ec -0 Ju 1 ne 0 D 2 ec Ju 02 ne 0 D 3 ec Ju 03 ne 0 D 4 ec -0 Ju 4 ne 0 D 5 ec -0 5 Ju
3 94 ne
D
-9
ec
Ju
D
Ju
ne
93
0
CHILE OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 46 ■ Public consumption 9 ■ Investment 18
Exports: 36% of GDP
Imports: 33% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
3500
4000 3500 3000 2500 2000 1500 1000 500 0
3000 2500 2000 1500 1000 500 0 USA
Japan
China South Korea Mexico
Argentina
USA
Brazil
China
2
Germany
IMPORTS by products ■ All food items 8% ■ Fuels 19% ■ Chemical products 13% ■ Other manufactured goods 23% ■ Capital goods and transport equipment 34% ■ Miscellaneous 3%
EXPORTS by products ■ All food items 28% ■ Agricultural raw material 9% ■ Ores and metals 41% ■ Chemical products 7% ■ Other manufactured goods 7% ■ Miscellaneous 8%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
Chile 9,810 4,360 0.854 47 87 26.9 221 119.3
Regional average DC average 7,130 3,280 0.795 44 77 31 170 67
4,300 1,280 0.697 33 43 31 112 28.4
163
THE AMERICAS
Colombia Population (million inhabitants) GDP (US$ million)
45.3 97,700
Short-term: B
Coface analysis
Medium-term: Moderately high risk
STRENGTHS ● Colombia has abundant natural resources (agriculture, oil and minerals). ● Having diversified its exports in the ATPDEA (Andean Trade Promotion and Drug Eradication Act) framework, the country has become the Andean community’s leading manufacturing power. ● It has maintained economic policy continuity on public sector financial consolidation, gradual disinflation and financial sector strengthening. ● Colombia has benefited from substantial US aid in combating guerrillas and eradicating drug production and trafficking.
164
RISK ASSESSMENT After better-than-expected performance in 2005, growth should sag in 2006 with consumption, buoyed by credit expansion and investment, mainly underpinning economic activity. Exports will make a more modest contribution amid a less buoyant international environment (raw material prices, economic conditions in the United States, financial markets). In that context, payment experience should remain satisfactory with companies honouring their commitments in a timely manner. Although greater fiscal orthodoxy under an IMF agreement has allowed the country to continue public sector deficit reduction, broader tax reforms
WEAKNESSES The security situation continues to be a problem due to the presence of Latin America’s largest guerrilla movement (FARC) and the climate of violence linked to drug trafficking. ● The wide gulf between urban and rural areas, the severe income inequality and social policy shortcomings have been undermining the country’s cohesiveness. ● The continued high level of public sector debt has been a major constraint limiting the room for manoeuvre enjoyed by government authorities. ● With external debt ratios still high, the country has remained vulnerable to a crisis of confidence among international lenders. ● Overexposure to sovereign risk has undermined the banking sector. ●
will be necessary to consolidate public sector finances and reduce its still high public debt burden (nearly 50 per cent of GDP). Colombia, Ecuador, and Peru have been negotiating with the United States on establishing a free-trade agreement to succeed ATPDEA, scheduled to expire end-2006. In the interim, although external accounts will deteriorate slightly, Colombia will continue to meet its financing needs easily due notably to substantial FDI inflows. The debt service burden will nonetheless remain relatively heavy and vulnerable to increases in US interest rates. Politically, in the wake of the Constitutional Court’s decision end-2005 to authorize several
COLOMBIA MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ billions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
1.5 7.7 -3.5 12.8 12.3 0.6 -1.1 -1.4 47.6 39.0
1.9 7.0 -4.2 12.3 12.1 0.2 -1.3 -1.6 45.8 42.8
4.0 6.5 -3.2 13.8 13.3 0.6 -1.0 -1.2 48.1 41.8
4.0 5.5 -1.7 17.2 15.9 1.4 -1.0 -1.0 39.5 26.5
4.4 5.2 -1.5 21.6 19.4 2.2 -0.8 -0.7 32.6 27.4
3.8 4.8 -1.4 22.4 20.8 1.6 -1.6 -1.3 30.9 20.4
6.3
6.8
6.3
191.2
6.3
6.3
2
f = forecast
consecutive presidential terms in office, the incumbent president, Alvaro Uribe, has a good chance of being re-elected in May 2006. Institutional weaknesses could nonetheless persist
along with the security problems notwithstanding the weakening of FARC and partial demobilization of paramilitary groups.
CONDITIONS OF ACCESS TO THE MARKET
number of applicable rates will be cut from nine to two. These reforms will back measures to combat tax evasion taken by the government with such success in 2005. Attitude towards foreign investors All sectors of the economy are open to foreign investment, except for defence and the processing of toxic, hazardous or radioactive waste not produced in the country. Investment in financial services, oil, gas and mining is subject to prior government approval.
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PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Colombia
250
200
150
100
50
D ec -0 5
04 D ec -0 4 Ju ne 04
D ec -0 3
Ju ne
02 D ec -0 2 Ju ne 03
D ec -0 1
Ju ne
00 D ec -0 0 Ju ne 01
99 D ec -9 9
Ju ne
D ec -9 8
Ju ne
97 D ec -9 7 Ju ne 98
0
Ju ne
Means of entry The few remaining barriers to trade arise mainly from the legal uncertainty created by frequent parliamentary changes as well as the plethora of government bodies and players operating without unified standards. This is especially true of taxation. To remedy the situation, the Colombian Congress has passed a legal stability law in repsect of both foreign and domestic investment.Under the new law, an investor that has signed a legal stability agreement – containing a clause the stability of which is all-important – with the Colombian government is entitled to compensation if that clause is amended. Sweeping reforms designed to streamline the tax system are also in the pipeline. Under these reforms, the rate of corporation tax will be brought closer in line with that of neighbouring countries in order to improve Colombia’s competitiveness. The loss of tax revenues will be offset by the elimination of one category of exemptions. As for VAT, the
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165
THE AMERICAS Foreign exchange regulations Under the floating exchange rate system adopted at the end of September 1999, the peso fell sharply
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until the end of the first quarter of 2003, losing 29 per cent of its value. The currency has since appreciated to around 2,300 pesos to the US dollar.
OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 53 ■ Public consumption 17 ■ Investment 12
Exports: 21% of GDP
Imports: 22% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
8000 7000 6000 5000 4000 3000 2000 1000 0
5000 4000 3000 2000 1000 0 USA
Ecuador Venezuela
Peru
Mexico
USA
Brazil
Mexico Venezuela China
IMPORTS by products ■ All food items 11% ■ Chemical products 22% ■ Other manufactured goods 21% ■ Capital goods and transport equipment 38% ■ Miscellaneous 8%
EXPORTS by products ■ All food items 17% ■ Agricultural raw materials 6% ■ Fuels 37% ■ Chemical products 9% ■ Other manufactured goods 22% ■ Miscellaneous 9%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
166
Colombia 6,40 1,810 0.785 46.46 76 31.8 179 49.3
Regional average DC average 7,130 3,280 0.795 44 77 31 170 67
4,300 1,280 0.697 33 43 31 112 28.4
COSTA RICA
Costa Rica Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
4.0 17,427 4,356
2
Short-term: B
Coface analysis
Medium-term: Moderately high risk
RISK ASSESSMENT Economic growth should sag with domestic demand affected by more restrictive monetary policy and uncertainty linked to the election period, as well as foreign demand stagnating due notably to a decline in microprocessor prices. The economic slowdown and public spending rigidity have contributed to sustaining a significant fiscal deficit with tax reform still pending. That reform should make it possible to reduce the relatively heavy public sector debt burden (55 per cent of GDP). Meanwhile, external accounts will remain in deficit with the steadiness of tourism not sufficing to offset the large outflows of profits repatriated by multinationals. The growth of foreign debt will remain moderate, even though the country has remained exposed to liquidity problems due to
its limited foreign currency reserves. The central bank will, moreover, have the difficult task of preserving exchange rate competitiveness while containing strong inflationary pressures partly attributable to oil prices. Furthermore, several factors have weakened the banking system including extensive state ownership, substantial dollarization and the existence of an offshore sector subject to little supervision. With its democratic institutions and good social indicators, the country is nonetheless still attractive to foreign investors. However, the prospect of a new minority government emerging from the presidential and legislative elections scheduled in February 2006 does not bode well for a speed-up of pending structural reforms.
MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ billions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
1.0 11.3 -3.2 4.9 5.7 -0.8 -4.3 29.2 14.3
2.9 9.2 -5.0 5.3 6.5 -1.3 -5.4 30.8 12.8
6.5 9.4 -4.3 6.2 7.3 -1.1 -5.3 33.6 14.2
4.2 12.3 -3.5 6.3 7.8 -1.5 -4.6 34.4 10.2
2.9 13.5 -3.6 6.7 8.5 -1.9 -4.8 34.8 9.3
2.5 11.2 -3.7 6.8 8.6 -1.9 -4.6 35.3 8.2
2.0
2.1
2.3
2.3
2.5
2.4
167 e = estimate, f = forecast
THE AMERICAS
Cuba Population (million inhabitants) GDP (US$ million)
11.3 25,104
Short-term: D
Coface analysis
Medium-term: Very high risk
STRENGTHS ● Cuba boasts great natural wealth including mineral resources (mainly nickel and cobalt), farming (sugar, tobacco), and fishing (rock lobster). ● Its developed tourism sector has been a major source of foreign currency. ● The country has a very well-trained and educated workforce and enviable social indicators for the region.
RISK ASSESSMENT Tourism-sector and nickel-export dynamism have continued to fuel economic growth. Diversification and reorientation of trade toward Venezuela and China have offset the decline of sugar production, weakening trade relations with the EU and the embargo by the United States. Development of relations with Venezuela and China has also allowed Cuba to obtain some external financing. The country has nonetheless remained very vulnerable to exogenous shocks. The high prices paid for oil, which has represented onefifth of imports, have thus weakened the island economy despite a preferential delivery agreement
168
WEAKNESSES The country is very dependent on raw material exports subject to price volatility (sugar, nickel) and tourism. ● The re-centralization of the economy that accompanied the suspension of dollar transactions on the island end-2004 has impeded foreign investment. ● In arrears on its debt, Cuba has only limited access to external financing. ● President Fidel Castro’s succession and the strained relations with the United States have been major elements of uncertainty. ●
concluded with Venezuela. Moreover, external accounts have been out of balance, with the robust raw material exports to China and revenues derived from services not sufficing to offset the high level of durable goods imports. Moreover, the emphasis placed by government authorities on investment spending will tend to widen the fiscal deficit. A strengthening of controls on companies has accompanied the suspension end-2004 of dollar-denominated transactions on the island, with a broader role devolving to the central bank. Furthermore, the creation of two currencies, the peso and the convertible peso, has tended to maintain distortions within the economy.
CUBA MAIN ECONOMIC INDICATORS 2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP)* Debt service (%Exports) Foreign exchange reserves (in months of imports)
3.0 -1.4 -2.3 1.8 4.8 -3.1 -0.6 -2.2 46.5 15.0
1.5 7.0 -3.2 1.6 4.6 -3.0 -0.8 -2.6 48.2 15.3
2.6 -1.0 -3.4 1.7 4.6 -3.0 -0.2 -0.6 48.1 15.7
4.0 4.0 -3.5 2.2 5.3 -3.1 0.1 0.5 46.2 14.7
5.5 4.2 -3.5 2.3 6.7 -4.4 -0.8 -2.2 40.0 14.5
4.7 2.0 -4.0 2.5 7.2 -4.7 -0.9 -2.5 38.0 14.8
1.1
1.2
1.3
2.8
2.4
2.3
*
excluding Russian debt
CONDITIONS OF ACCESS TO THE MARKET Means of entry Cuba is one of the founding members of the WTO and maintains trade relations with every country in the world, except the United States, which has maintained a trade embargo against it for the last 40 years. The Helms-Burton and Torricelli Acts drive up the price of imports. However, since late 2001 the US government authorizes agricultural and pharmaceutical goods to be traded against cash. The country’s import regulations are very restrictive, with the government exercising tight controls (licences, prouct and sector import boards etc) and determining priority sectors. Price and funding are essential criteria, although quality, warranties and after-sales service are gaining importance. Customs duties on the whole are fairly low – France enjoys a preferential tariff – but in 2003 they were raised on a number of products. The country has big payment problems. As Cuba is not eligible for funding from international institutions (World Bank, IDB), it is forced to seek short-term loans (12–24 months) at rates that are 3–12 per cent higher than Libor. Settlements are lengthy because of the shortage of foreign exchange. The preferred means of payment for foreign trade transactions is the irrevocable documentary credit
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2005(e) 2006(f )
US$ billions
2
e = estimate, f = forecast
confirmed by a leading bank. As foreign payments cannot legally be made in dollars, other convertible currencies (euro, yen etc) are used. Exchange controls in force since July 2003 require Cuban firms and agencies to seek central bank approval for foreign trade payments. These controls were tightened in January 2005 with the introduction of a single foreign currency account held with the Central Bank of Cuba where all the income in convertible currency earned by Cuban undertakings is deposited. All import applications are now vetted by an approvals committee, chaired by the Central Bank of Cuba, before any foreign exchange is allocated. Attitude towards foreign investors Cuba has encouraged foreign investment only in the last ten years or so and today has bilateral investment promotion and protection agreements with 53 countries, including France. There is, however, no double taxation agreement between France and Cuba. Sectors that have attracted FDI include tourism, basic industry, energy, telecommunications, foodstuffs and banking. In general, education, health care and services are closed to foreigners. Bureaucratic and restrictive procedures regulate foreign investment, which must not compete with locally produced goods and is
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THE AMERICAS subject to strict technology transfer, capital contribution and export development criteria. The Cuban government now focuses only on projects considered useful for the country’s economic development. ‘Big projects’ are automatically preferred if they fit in with government priorities. Economic difficulties, red tape and the HelmsBurton Act hamper foreign investment inflows to the island. FDI has shrunk considerably in the last few years and barely totals US$5.5 billion since the opening of the market in 1995. The government reserves the right to grant, renew or refuse without explanation licences to foreign entities (representative offices, branches, mixed enterprises, economic associations etc.). The tax system does not discriminate against foreign investors and offers a number of incentives. Free zones award company exemptions from business and labour taxes, customs duties and corporation tax. Labour on the whole is skilled, but it is expensive and lacks motivation. The employing entity, necessarily Cuban, can decide pay rises unilaterally and lay off essential employees. Severance payments are compulsory and very high. Foreign exchange regulations 2005 marked an end to the circulation of the dollar in the Cuban economy for all cash payments. The benchmark currency today is the Cuban peso
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170
(CUC), which is convertible only in Cuba. However, there are still two currencies in Cuba: the CUC and the CUP (domestic peso). Food staples and essential goods and services (urban transport, water, gas, electricity, telephone) meant for the Cuban public are denominated in CUPs. On the other hand, all goods available through the foreign currency distribution network and services to foreigners are payable in CUCs. A 10 per cent tax is now levied by banks on the sale of US dollars against convertible pesos. This tax is not applied to the other freely convertible currencies recognized by the Cuban government (euro, Swiss franc, sterling, Canadian dollar). The growth in foreign exchange reserves since April 2005 has led to an 8 per cent revaluation in the CUC against the US dollar. Parity between the two currencies is no longer fixed. In the past, one Cuban peso was worth one dollar; today it fetches US$1.08 (US$1=CUC0.9259). The dollar has been severely penalized compared with other currencies whose exchange rates are calculated directly against the dollar. The CUP was revalued by 7 per cent in March 2005 to CUP24:CUC1, against CUP26 previously. The government is planning several revaluations of the CUP against the CUC with a view to unifying the two currencies. However, there is little likelihood of this happening before the end of 2006 at the earliest.
CUBA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 59 ■ Public consumption 19 ■ Investment 8
Exports: 16% of GDP
Imports: 18% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
350
600
300
500
250
2
400
200
300
150
200
100
100
50 0
0 Netherlands Canada
Russia
Spain
China
Spain Venezuela
Italy
USA
China
IMPORTS by products ■ All food items 20% ■ Fuels 22% ■ Chemical products 10% ■ Machinery and equipment 22% ■ Miscellaneous 25%
EXPORTS by products ■ Sugar and derivatives 20% ■ Nickel 50% ■ Tobacco products 13% ■ Medicine 8% ■ Miscellaneous 10%
STANDARD OF LIVING / PURCHASING POWER Indicators
Cuba
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
n/a n/a 0.817 n/a 76 20.3 51 31.8
Regional average DC average 7,130 3,280 0.795 44 77 31 170 67
4,300 1,280 0.697 33 43 31 112 28.4
171
THE AMERICAS
Dominican Republic Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
8.7 16,541 1,901
Short-term: C
Coface analysis
Medium-term: High risk
RISK ASSESSMENT After the catch-up phase in 2005 following the banking crisis and the recession of 2003, economic growth – still driven by private consumption – should sag slightly. Inflation, which had fallen sharply, will continue to be fuelled by high oil prices despite preferential agreements with Mexico and Venezuela. The Dominican Republic has, moreover, been very dependent on hydrocarbon imports, which have weighed on external accounts with the elimination of textile quotas decimating exports. The country has nonetheless continued to benefit from substantial inflows of expatriate remittances and revenues from tourism, and will benefit from implementation early-2006 of the free trade
agreement with Central America and the United States. Meanwhile, public sector debt has remained high despite fiscal consolidation. External debt ratios have been improving due to the programme agreed with the IMF early-2005, rescheduling granted by the Paris Club, and restructuring of commercial debts. Liquidity problems have nonetheless persisted due to the low level of foreign currency reserves, and the financial system is still in a difficult situation. President Leonel Fernandez, in office since August 2004, has been credited with improving the economic situation. However, he lacks a parliamentary majority, at least until the May 2006 legislative elections, while the tight fiscal policy has been stoking social tensions.
MAIN ECONOMIC INDICATORS US$ billions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2005(e) 2006(f )
2001
2002
2003
2004
2.9 8.9 -1.9 5.3 8.8 -3.5 -3.4 23.6 4.9
4.3 5.2 -2.3 5.2 8.8 -3.7 -3.7 27.6 6.1
-1.9 27.5 -4.8 5.4 7.6 -2.2 6.2 42.9 12.0
2.0 51.5 -2.7 5.8 7.8 -2.1 6.6 41.0 8.8
4.7 8.4 -0.5 5.8 9.7 -3.9 -1.3 35.7 7.2
4.3 8.0 0.4 5.9 10.3 -4.4 -2.9 35.4 8.0
1.2
0.6
0.3
1.0
1.4
1.8
172 e = estimate, f = forecast
ECUADOR
Ecuador Population (million inhabitants) GDP (US$ million)
13.2 30,281
2
Short-term: C
Coface analysis
Medium-term: High risk
STRENGTHS ● Ecuador possesses substantial oil resources and, with construction of a new pipeline, it will be able to increase production and exports. ● As the world-leading exporter of bananas and shrimp, the country enjoys a solid export base. ● Dollarization ended the vicious circle of inflation, exchange rate depreciation and capital flight. ● Higher real wages and improved access to credit have bolstered private domestic demand.
RISK ASSESSMENT The political situation has been shaky since President Lucio Gutierrez’ removal from office in April 2005, followed by strikes in August and with presidential elections scheduled for October 2006. That climate has affected household and investor confidence and has slowed economic activity despite the good oil market conditions. In response to popular protest, interim President Alfredo Palacio has demonstrated his determination to increase social spending – at the expense of debt repayment – and to renegotiate the
WEAKNESSES Chronic political instability has affected the economic and financial situation and impeded reforms. ● A foreign exchange liquidity crisis has remained a critical risk due to the very low level of currency reserves. ● Ecuador has still not regained access to capital markets since the 1999 crisis. ● An insufficiently diversified economy has been vulnerable to oil price swings. ● Dollarization has affected the competitiveness of some agricultural and industrial segments. ● Social tensions and geographic disparities have undermined the country’s cohesiveness. ●
formula for sharing oil resources with international companies. In that context, the improvement in public sector finances and debt ratios achieved in recent years could come to a halt. That possibility has, moreover, exacerbated financial market skittishness with Ecuador continuing to face high liquidity crisis risk due to the inadequacy of its currency reserves. The country’s political instability and weak institutional and legal environment has tended to deter local and foreign investors, which has hardly been conducive to diversifying the economy.
173
THE AMERICAS MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ billions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
5.1 22.4 0.0 4.8 5.2 -0.4 -0.7 -3.2 69.8 26.7
3.4 9.5 -0.8 5.2 6.2 -1.0 -1.4 -5.6 64.8 25.9
2.7 6.2 -1.2 6.2 6.3 -0.1 -0.5 -1.7 58.5 24.2
6.9 2.0 -2.3 7.7 7.5 0.3 -0.1 -0.4 51.3 23.6
3.4 2.7 -2.2 9.5 8.4 1.1 0.3 0.9 49.9 20.5
3.0 2.3 -2.1 9.9 8.8 1.1 0.2 0.6 49.5 18.4
1.3
0.9
1.0
1.2
0.9
0.9
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Means of entry Ecuador is a founding member of the Andean Community of Nations (ACN) and, in principle, observes WTO rules since accession in 1996. While trade between Ecuador and its three ‘main’ ACN partners – Colombia, Bolivia and Venezuela – has been fully exempt from customs duties since 1994, a host of ad hoc tariff and non-tariff barriers hamper intra-ACN trade. The customs nomenclature used by Ecuador is similar to the one known as NANDINA (Common Nomenclature of the Member Countries of the Cartagena Agreement), set out in decision 381 by the Junta of the Cartagena Agreement and replaced in April 2002 by decision number 507 of the ACN. Since February 1995, the ACN countries (Venezuela, Colombia, Ecuador, Peru and Bolivia) have a common external tariff (Arancel Externo Común or AEC) with six tiers of customs duty: 3 per cent and 5 per cent for production factors and raw materials; 10 per cent for semi-finished goods; 20 per cent for finished goods and 35 per cent for vehicles. The 15 per cent tier was abolished on 1 January 2004. Ecuador has submitted to the ACN commission a list of 195 finished goods it wishes to keep in this tier.
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174
ACN member countries enjoy duty-free trade among themselves. However, under a bilateral agreement between Ecuador and Peru signed in December 1992, certain Peruvian products were, until the agreement’s expiry on 31 December 2004, liable to 3, 4, 5, 7, 7.5, 8, 10 and 12.75 per cent customs duty. Since December 2003, a foreign trade information system (SICE) is in operation. This enables key documents and declarations to be submitted electronically. However, import procedures remain lengthy. Ecuador runs a highly complex system of controls, prohibitions, authorizations and permits. Moreover, frequent changes in legislation create a high degree of legal uncertainty. Attitude towards foreign investors In theory, non-discrimination between domestic and foreign investors is the norm, except in socalled strategic sectors (real estate along the borders). In practice, however, this liberalism is negated by an extremely complex legal and judicial system that breeds uncertainty. The high concentration of political, economic and financial power can also distort application of the law.
■
Foreign exchange regulations The widespread use of the US dollar provides some monetary stability.
■
ECUADOR OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 53 ■ Public consumption 7 ■ Investment 22
Exports: 24% of GDP
Imports: 29% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
3000
2000
2500
2
1500
2000 1500
1000
1000
500
500 0
0 USA
Colombia Germany
Italy
Russia
USA
Colombia Brazil
Chile
Japan
IMPORTS by products ■ All food items 9% ■ Fuels 10% ■ Chemical products 17% ■ Other manufactured goods 24% ■ Capital goods and transport equipment 37% ■ Miscellaneous 3%
EXPORTS by products ■ All food items 41% ■ Agricultural raw materials 6% ■ Fuels 43% ■ Manufactured goods 10%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
Ecuador 3,440 1,830 0.759 41.6 64 32.7 122 31.1
Regional average DC average 7,130 3,280 0.795 44 77 31 170 67
4,300 1,280 0.697 33 43 31 112 28.4
175
THE AMERICAS
El Salvador Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
6.5 14,879 2,289
Short-term: B
Coface analysis
Medium-term: Moderately high risk
RISK ASSESSMENT Economic growth was weak in 2005 with the textile sector’s maquilas facing stiff competition from China. In 2006, private consumption will again be the main economic engine, buoyed by transfers from expatriates with high oil prices again stoking inflation. In the wake of the damage caused in 2005 by Hurricane Stan and the Illamatepec volcanic eruption, public spending should also contribute to growth at the expense, however, of a continued deficit and increased public sector debt. Exports have been suffering from a lack of competitiveness and the trade deficit should, moreover, widen since the country’s participation in the CAFTA free trade
area with Central America and the United States will initially stimulate investment and thus imports. However, foreign currency reserves should remain at reasonable levels. Although President Antonio Saca’s popularity and his Arena Party’s hold on power for the past 16 years reflect the country’s political stability, government authorities will have to take structural reforms further in several areas: overhauling the education and health systems, broadening the tax base, improving governance and combating corruption. However, the foreseeable lack of a clear majority in the upcoming legislative elections in March 2006 could hamper their implementation.
MAIN ECONOMIC INDICATORS US$ billions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports* Imports* Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports)* Foreign exchange reserves (in months of imports)*
176
* excluding
maquilas
2001
2002
2003
2004
2005(e) 2006(f )
1.7 3.8 -4.3 2.9 4.8 -1.9 -1.1 36.2 10.3
2.2 1.8 -4.6 3.0 4.9 0.0 -2.9 48.3 16.4
1.8 2.5 -3.8 3.2 5.4 -2.3 -4.9 53.5 12.2
1.5 4.2 -2.9 3.3 5.7 -2.4 -4.4 52.4 20.0
1.9 4.7 -3.1 3.6 6.4 -2.8 -5.0 52.1 14.1
2.5 5.0 -3.2 3.8 6.8 -3.0 -4.8 52.4 15.3
4.1
3.6
3.8
3.6
3.0
2.9
e = estimate, f = forecast
GUATEMALA
Guatemala Population (million inhabitants) GDP (US$ million)
12.3 26,845
2
Short-term: B
Coface analysis
Medium-term: High risk
STRENGTHS ● Implementation of the Central American freetrade agreement with the United States in 2006 will generate new opportunities for the country. ● Orthodox economic policy has made it possible to keep fiscal deficits at reasonable levels. ● The country has benefited from international financial assistance. ● Its tourist potential is high.
RISK ASSESSMENT After a moderate recovery in 2005, growth will be driven by public spending and increased expatriate remittances, with the latter spurring consumption and financial services. Business should also be robust in the construction sector in the wake of Hurricane Stan, which devastated the country in October 2005 and whose economic impact may exceed the damage caused by Mitch in 1998. Meanwhile, high oil prices have been undermining household purchasing power and stoking inflationary pressures. In that context, President Oscar Berger, in office since January 2004, has pursued orthodox economic policy under IMF aegis, with fiscal policy focused
WEAKNESSES The country has been very vulnerable to natural catastrophes. ● The contrast between, at one extreme, the export-oriented textile industry and large farm properties and, at the other, subsistence farming has been a handicap. ● Exports have been too concentrated on a few traditional farm products – coffee, bananas and sugar – subject to price volatility. ● Guatemala continues to be very inegalitarian with the Indians, representing 60 per cent of the population, still marginalized despite commitments made on their behalf under the 1996 peace accords. ● With the country still scarred by the aftermath of 30 years of civil war, there has been continuing conflict over farmland ownership. ●
mainly on increasing tax revenues to finance essential social programmes. Meanwhile, current account deficits will persist in 2006 despite the volume of expatriate transfers, with the country not yet deriving benefit from the Central American free trade agreement implemented recently. Foreign exchange reserves have nonetheless been at satisfactory levels, due notably to foreign investment inflows, while foreign debt ratios have remained moderate. Profound ethnic, social and geographic divisions have persisted, however, while the lack of a congressional majority has limited the president’s room for manoeuvre in implementing ad hoc reforms.
177
THE AMERICAS MAIN ECONOMIC INDICATORS US$ billions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2005(e) 2006(f )
2001
2002
2003
2004
2.2 7.6 -2.3 2.9 5.6 -2.7 -1.3 -6.0 21.4 8.4
2.2 8.1 -0.8 2.8 6.3 -3.5 -1.2 -5.3 20.7 8.2
2.1 5.4 -2.0 3.1 6.7 -3.7 -1.0 -4.2 20.3 8.3
2.7 8.3 -0.4 3.4 7.8 -4.4 -1.2 -4.4 17.7 7.3
3.1 9.1 -1.7 4.0 8.5 -4.6 -1.2 -3.9 16.5 7.0
3.4 7.5 -1.2 4.3 8.8 -4.4 -1.2 -3.7 16.0 6.9
4.2
3.7
4.3
4.5
4.5
4.4
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Means of entry Customs duties have been sliding since 1986 and the average rate of duty is currently 5.5 per cent. Under the Common External Tariff (CET) of the Central American Common Market (CACM), the rate of duty on commodities and capital goods is 0 per cent, on finished goods 15 per cent, and on semi-finished goods between 5 and 10 per cent. Certain farm products and locally produced goods continue to be protected. Import licences are not required. The new health regulations on wine and alcohol labelling are restrictive, but applied in a non-discriminatory manner. The two leading audit companies – SGS and Bureau Veritas – operate on a non-compulsory contractual basis at the request of the importer or exporter. Although the accounts of local companies remain untransparent, payments no longer pose a problem since the reform of the financial system in late 2002. Interest rates, which average around 8.5–9 per cent for quetzals (GTQ), 7 per cent for US dollars, seem to be trending downwards. Letters of credit are the most widely used means of payment. Transfers are usually carried out in a timely manner.
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Attitude towards foreign investors According to UNCTAD, foreign investment inflows into Guatemala in 2004 amounted to US$154.7
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178
million. To encourage foreign start-ups, the government investment promotion and development agency, Invest in Guatemala, was revived in September 2004. Six priority sectors have been identified: call centres and services outsourcing, tourism, agri-food industry, garments, light industry and forestry. A plan designed to strengthen the country’s competitiveness (Agenda Nacional de Competividad 2005-2015) has recently been launched. Ranked 97th on the World Competitiveness League Table, published by the World Economic Forum in September 2005, Guatemala lags behind El Salvador (56) and Honduras (93) and is ahead only of Nicaragua (99) among Central American countries. The attractiveness of Central American countries has been enhanced by the free-tradeagreement with the United States. Foreign investors benefit from the most-favoured nation clause and are treated on an equal footing with local investors. Only a handful of so-called strategic or national security sectors have restrictions on investment. The formalities are by and large the same as those for Guatemalan nationals. Foreign investors establishing themselves in a free zone or under decree law number 29-89, on the promotion of export activities, are exempt from customs duties on imports of capital goods and raw materials, ten years of corporation tax (31 per cent), VAT (12 per cent) and real estate tax (only in free zones).
GUATEMALA Post-startup difficulties derive more from the sociocultural and political environment prevalent in Central America, than from actual discrimination against foreign investors. The costs associated with physical insecurity are greater here than elsewhere. On the employment front, at least 90 per cent of a firm’s staff must be made up of Guatemalans, and wages paid to foreigners must not exceed 15 per cent of the total payroll. The minimum monthly wage is currently GTQ1,440 (about US$180). Statutory working time may not exceed eight hours a day and 44 hours a week. In principle, the legal system offers identical safeguards to foreign and national investors, but
corruption and opaque administrative procedures often place foreigners at a disadvantage. Foreign exchange regulations There are no restrictions on capital, dividend and currency transfers. Exchange controls were abolished in 2001. The so-called ‘Free Currency Trading’ Act has legalized the circulation of the dollar within the economy and allows people to open dollar-denominated accounts and make all types of payment in that currency. Some banks allow accounts to be held in euros. No authorization is required for capital and profit transfers.
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2
179
THE AMERICAS OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 70 ■ Public consumption 4 ■ Investment 13
Exports: 16% of GDP
Imports: 28% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
3000
3000
2500
2500
2000
2000
1500
1500
1000
1000
500
500 0
0 USA
El Nicaragua Mexico Salvador
Costa Rica
USA
Mexico
South Korea
El Salvador
China
IMPORTS by products ■ All food items 13% ■ Fuels 14% ■ Chemical products 18% ■ Other manufactured goods 26% ■ Capital goods and transport equipment 27% ■ Miscellaneous 2%
EXPORTS by products ■ All food items 47% ■ Fuels 8% ■ Chemical products 16% ■ Other manufactured goods 20% ■ Miscellaneous 8%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
180
Guatemala 4,090 1,910 0.663 48.3 41 42.5 71 14.4
Regional average DC average 7,130 3,280 0.795 44 77 31 170 67
4,300 1,280 0.697 33 43 31 112 28.4
HAITI
Haiti Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
8.4 2,921 347
2
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT The presidential election has finally taken place in February 2006, after having been postponed several times due to the climate of violence and logistical problems. The frontrunner, former President René Préval, has been declared the winner after a change in the vote count of blank ballots. He will have to cope with social problems, economic underdevelopment and very troubling deterioration of the natural environment caused by deforestation. Insecurity has jeopardized the rare instances of productive work undertaken in the formal economy. Moreover, hurricane damage has affected economic growth with high oil prices spurring inflation. In 2004 the interim government obtained US$1 billion in aid from the international community to re-establish security and restore basic services and
infrastructure. Only slightly over half that amount could be effectively paid due the limited capacity of government authorities to absorb the funds. The agreement’s validity was thus extended to end-2007 while the possibility of Haiti benefiting from the HIPC programme for highly indebted poor countries has also been envisioned. Pending additional aid, remittances from emigrants have remained the main source of revenues. Haiti has thus remained Latin America’s poorest country with its institutions in a state of total collapse. Besides its dependence on international financial aid, it also depends on the United Nations Stabilization Mission in Haiti (MINUSTAH), which has not succeeded, however, in restoring law and order, not to mention civil peace.
MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004(e)
2005(f ) 2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance Current account balance (%GDP)* Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
-1.0 16.8 -2.5 305 1,055 -750 -224 -6.3 39.5 3.8
-0.5 10.1 -2.8 273 983 -709 -145 -4.5 42.9 3.1
0.5 42.5 -3.2 330 1,116 -785 -141 -5.0 44.3 3.1
-3.8 22.5 -3.7 373 1,183 -810 -97 -2.7 37.2 3.2
1.5 15.0 -5.0 416 1,547 -1,131 -326 -8.4 31.2 3.3
2.5 13.0 -2.1 444 1,721 -1,278 -454 -10.8 30.7 2.8
2.1
1.7
1.3
1.6
1.4
1.5
181 *
excluding donations
e = estimate, f = forecast
THE AMERICAS
Honduras Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
7.0 6,978 997
Short-term: C
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT The narrow election win end-November 2005 by the new president, Manuel Zelaya, from the Liberal Party, will not facilitate matters in implementing his programme. His political and economic options will nonetheless not fundamentally differ from those of the National Party previously in power except for the emphasis put on social policy in a country where 80 per cent of the population lives below the poverty line. Economic policy will remain focused on the main objectives approved by the IMF (fiscal deficit reduction, monetary stability, banking system reinforcement) to allow Honduras to benefit from cancellation of part of its foreign debt under the HIPC programme for highly indebted poor
countries. Improving the outlook will also depend on the new administration’s capacity to promote reforms – like modernizing the energy, transport, and telecommunications sectors – and reduce the influence of the maras, armed gangs of delinquent youths. In that context, two main factors should continue to drive economic growth: private consumption buoyed by expatriate remittances and exports of coffee, bananas and textile products manufactured by maquiladoras. Meanwhile, high hydrocarbon prices, among other factors, will continue to generate inflationary pressures. Moreover, the volume of imports, due notably to oil purchases, will sustain substantial trade and current account deficits nonetheless covered by aid and FDI.
MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ billions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2.6 8.8 -6.1 1.4 2.8 -1.4 -10.5 78.1 19.8
2.7 8.1 -5.3 1.4 2.8 -1.5 -3.1 82.1 19.0
3.5 6.8 -6.0 1.4 3.1 -1.7 -3.7 80.6 17.9
4.6 9.2 -3.5 1.6 3.7 -2.1 -5.2 79.1 10.9
4.0 9.2 -3.0 1.7 4.2 -2.4 -5.5 76.1 10.5
3.8 9.0 -2.5 1.8 4.4 -2.6 -4.6 72.8 9.2
4.4
5.1
4.5
5.0
4.9
5.0
182 e = estimate, f = forecast
JAMAICA
Jamaica Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
2.6 8,147 3,133
2
Short-term: C
Coface analysis
Medium-term: High risk
RISK ASSESSMENT After hurricane Ivan’s negative impact on the farm and tourism sectors end-2004 followed by additional weather problems in 2005, growth should recover moderately, driven mainly by investment intended for reconstruction. However, a farm production shortfall and high oil prices have been stoking double-digit inflation. Imports, moreover, increased by capital goods and hydrocarbon purchases, should substantially exceed exports, which have been slack amid stagnant farm product sales and the decline of alumina prices, thereby causing external account deficits to widen further despite tourism revenues and expatriate remittances.
Meanwhile, fiscal policy has focused on reducing excessive public sector debt, representing 130 per cent of GDP, with interest alone absorbing nearly half of public spending. The need to significantly reduce that debt burden, including about 40 per cent owed abroad, calls for implementation of austerity policy. With elections scheduled in 2007, however, such policy could increase social tensions and insecurity. The country has, moreover, remained very exposed to exogenous shocks like natural catastrophes or changes in the international economic environment affecting commodity exports or tourism.
MAIN ECONOMIC INDICATORS US$ billions
2001
2002
2003
2004
2005(e) 2006(f )
Economic growth (%) Inflation (average annual rate, %) Public balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
1.5 8.0 -5.6 1.4 3.0 -1.6 -9.4 66.3 14.0
1.1 6.5 -7.6 1.3 3.3 -2.0 -15.6 68.7 16.7
2.3 12.9 -6.6 1.5 3.3 -1.8 -6.8 67.2 14.5
1.2 12.8 -5.0 1.6 3.6 -2.1 -8.5 66.0 17.4
1.8 15.5 0.0 1.7 4.0 -2.3 -9.0 59.5 18.9
2.9 12.5 0.0 1.7 4.4 -2.6 -11.0 58.3 16.2
4.4
2.7
3.3
3.8
3.7
3.5
183 *
March of year x and April of year x+1
e = estimate, f = forecast
THE AMERICAS
Mexico Population (million inhabitants) GDP (US$ million)
102.3 676,500
Short-term: A4
Coface analysis
Medium-term: Low risk
STRENGTHS ● Mexico has become a major manufacturing power, notably by capitalizing on its membership in NAFTA. ● Its macroeconomic stability has been good. ● The control exercised over internal and external deficits along with a moderate foreign debt level has reassured international investors. ● With the banking sector consolidated since the l994–1995 crisis, the country has been less vulnerable to a financial crisis. ● Mexico benefits from a young and growing work force.
RISK ASSESSMENT After the economic slowdown registered in 2005, a slight upturn is expected in 2006, due notably to easing monetary policy. Uncertainties associated with the July 2006 presidential and legislative elections could affect domestic demand, however, while demand from the United States, on which Mexico has been very dependent, could be less dynamic. Moreover, some sectors (like textiles), since the dismantlement of quotas in early 2005, have continued to suffer from problems of competitiveness with China. In that context, company payment behaviour is still marked by lengthening payment times, which frequently give rise to commercial negotiations.
184
WEAKNESSES Mexico has suffered from the excessive concentration of its exports on the United States and from competitiveness problems in relation to trade rivals like China. ● Public finances have been highly dependent on oil revenues. ● Political gridlock has impeded progress on essential structural reforms (taxation, energy, labour code). ● A lack of investment and skilled labour has hindered efforts to move production upmarket. The business environment is still perfectible amid governance, corruption and insecurity problems. ●
Mexico’s economic and financial fundamentals have nonetheless been good. Tight fiscal policy has limited the deficit in public finances, although these still remain dependent on oil revenues. The external account deficit has been under control with the substantial financing needs met easily. Foreign debt has been moderate and Mexico has continued to capitalize on market confidence to further enhance its profile. Although the run-up to elections will not be very conducive to progress on reforms, there has been consensus among the three main parties (PAN, PRI, PRD) on preserving the macroeconomic stability policy.
MEXICO MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ billions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP)-3.7 Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
0.0 6.4 -3.7 158.4 168.4 -10.0 -18.1 -2.9 25.5 16.4
0.8 5.0 -3.4 160.8 168.7 -7.9 -13.6 -2.1 24.9 13.3
1.4 4.5 -3.2 164.8 170.5 -5.8 -8.5 -1.3 25.6 16.6
4.4 4.7 -2.4 188.0 196.8 -8.8 -7.4 -1.1 24.7 16.1
2.9 4.3 -2.2 210.9 219.8 -8.9 -11.3 -1.5 22.9 12.7
3.5 4.1 -2.1 228.2 236.6 -8.4 -10.1 -1.3 22.5 12.8
2.6
3.0
3.5
3.3
3.0
2.9
2
e = estimate, f = forecast
Means of entry Since the setting up of the North American Free Trade Association (NAFTA), Mexico offers incentives to companies looking to gain a strategic foothold on the American continent. These include gradual elimination of tariff barriers, industrial property protection and mobility of investment. In all, Mexico has also signed 12 free-trade agreements with 33 countries. The last, signed with Japan in September 2004, makes Mexico the only country in the world to have, at one and the same time, free trade agreements with the EU, United States and Japan. The free trade agreement with the EU, in force since 1 July 2000, makes it easier for EU countries to win back market share and step up investment, both of which have declined under the impact of NAFTA and competition from Asian products. All industrial products are now liable to 0–5 per cent customs duty. Tariff barriers will be dismantled by 2007. Government-licensed independent inspection companies are responsible for checking product compliance with Mexican Official Standards (NOM) and issuing certificates of conformity. The services of these companies are widely used but fairly expensive. The most common invoicing currency is the US dollar. Payments are made within 30–45 days, which is fairly quick considering the
■
high rates of interest and shortage of credit. Documentary credit is the safest means of payment for export firms, but expensive for the buyer. Attitude towards foreign investors The economy today is open to foreign investment, although a number of strategic sectors are closed and remain the preserve of Mexican companies. Foreigners may invest in these sectors only through a ‘neutral investment’ mechanism, ie without decisionmaking powers. Foreign investment in open sectors is subject to the approval of the National Commission on Foreign Investment above a certain threshold (currently €14 million). Below this threshold, foreigners may acquire 100 per cent of a Mexican firm without seeking the Commission’s approval. Since 1999, there is no capital ceiling on foreign investment in commercial and merchant banks.
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PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 500 450 400
WORLD Mexico
350 300 250 200 150 100 50 0
Ju ne 9 D 3 ec Ju 93 ne 9 D 4 ec Ju 94 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 97 D ec Ju 97 ne 9 D 8 ec -9 Ju 8 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 0 D 1 ec Ju 01 ne 02 D ec Ju 02 ne 0 D 3 ec Ju 03 ne 04 D ec Ju 04 ne 0 D 5 ec -0 5
CONDITIONS OF ACCESS TO THE MARKET
185
THE AMERICAS OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 53 ■ Public consumption 10 ■ Investment 15
Exports: 28% of GDP
Imports: 30% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
150000
120000
120000
100000 80000
90000
60000 60000
40000
30000
20000 0
0 USA
Canada Germany
Spain
Japan
USA
China
Japan
Germany
South Korea
IMPORTS by products ■ All food items 7% ■ Chemical products 10% ■ Other manufactured goods 26% ■ Capital goods and transport equipment 49% ■ Miscellaneous 8%
EXPORTS by products ■ All food items 6% ■ Fuels 11% ■ Other manufactured goods 21% ■ Capital goods and transport equipment 57% ■ Miscellaneous 5%
STANDARD OF LIVING / PURCHASING POWER
186
Indicators
Mexico
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
8,980 6,230 0.814 43.1 75 32.3 158 82
Regional average DC average 7,130 3,280 0.795 44 77 31 170 67
4,300 1,280 0.697 33 43 31 112 28.4
NICARAGUA
Nicaragua Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
5.5 4,083 742
2
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT Growth sagged in 2005 due to a decline in farm and industrial production and energy rationing; that trend will continue in 2006, due mainly to political uncertainties, while high oil prices will continue to stoke inflation. Nicaragua’s participation in CAFTA, the Central American Free Trade Area, should stimulate exports and investments in the future. However, its dependence on imports will cause the current account deficit to remain very large despite expatriates remittances and official grants, with large financing needs and a large foreign debt burden persisting as a result. Furthermore, the persistence of excessive public sector debt and a
shaky financial system will constitute an additional element of vulnerability. The political situation continues to be a source of concern, even though the constitutional conflict pitting ex-presidents Daniel Ortega (Sandinista Front) and Arnoldo Aleman (Constitutional Liberal Party) against the current president, Enrique Bolaños, was temporarily settled via signature of an agreement in October 2005, under pressure from the international community. Meanwhile, resumption of an IMF programme, necessary in sustaining investor and lender confidence, will depend on structural reforms, which could fall behind schedule lacking a political consensus and in the run-up to presidential elections in November 2006.
MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ billions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
3.0 7.3 -13.4 0.9 1.8 -0.9 -19.4 156.1 27.4
0.8 3.7 -10.5 0.9 1.8 -0.9 -19.2 162.5 33.2
2.3 5.3 -9.7 1.1 2.0 -1.0 -18.3 168.3 19.6
5.1 8.5 -7.0 1.3 2.4 -1.1 -17.3 108.7 16.3
3.6 10.1 -5.3 1.4 2.8 -1.4 -19.9 82.0 12.2
2.5 10.0 -5.0 1.5 3.0 -1.5 -19.3 74.3 11.2
1.8
2.3
2.3
2.8
2.4
2.3
187 e = estimate, f = forecast
THE AMERICAS
Panama Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
3.0 12,887 4,295
Short-term: A4
Coface analysis
Medium-term: Moderately high risk
RISK ASSESSMENT After benefiting once again in 2005 from a favourable world environment, economic growth, closely tied to world trade dynamism, should sag slightly in 2006 under the effect of less propitious external conditions and the flagging growth of domestic demand attributable to adoption of tighter fiscal policy. Stricter public finances management, since the tax reform voted in February 2005, along with the increased production and revenues registered by the Panama Canal Authority have made it possible to reduce public sector debt. That trend should
continue in 2006 and allow further reductions in the still relatively high level of that debt. External accounts, greatly affected by the increase in private consumption, high oil prices and profit repatriation, should return to more manageable current-account deficit levels. Meanwhile, the sustainability of the growth will depend on the capacity of government authorities to reduce poverty, implement social security and retirement system reform (postponed until 2006 amid popular protests), and finance the canal enlargement project at an estimated cost of US$8 billion, with the work possibly beginning in 2007.
MAIN ECONOMIC INDICATORS US$ billions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports* Imports* Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2005(e) 2006(f )
2001
2002
2003
2004
0.6 0.3 -0.7 0.8 2.7 -1.9 -1.5 65.2 23.2
2.2 1.2 -2.0 0.8 2.8 -2.0 -0.8 64.7 31.2
4.2 1.3 -4.8 0.8 2.9 -2.1 -3.9 63.7 16.9
7.6 0.2 -4.9 0.9 3.3 -2.4 -7.9 63.6 15.3
5.0 2.5 -3.6 1.0 3.7 -2.7 -7.5 61.7 14.0
4.5 1.9 -2.9 1.1 3.9 -2.8 -5.8 58.5 22.6
2.7
3.0
2.3
1.2
1.8
1.9
188 *
excluding Colon customs-free area
e = estimate, f = forecast
PARAGUAY
Paraguay Population (million inhabitants) GDP (US$ million)
5.6 7,123
2
Short-term: C
Coface analysis
Medium-term: High risk
STRENGTHS ● Paraguay has substantial farm potential considering the extent of its arable land and also boasts vast hydroelectric resources. ● The country has enjoyed the support of international financial institutions. ● The democratic system has had wellestablished foundations for several years now (pluralism, electoral transparency, liberty of expression).
RISK ASSESSMENT After an economic slowdown in 2005, attributable to the severe drought and consequent decline in cotton and soybean production, infrastructure investment and household consumption should fuel growth. That will give rise to a resurgence of inflation amid poor weather conditions, affecting farm prices, and high prices for imported oil. Exports should post little growth amid lessrobust foreign demand and with cotton and soybean prices stabilizing. Increased imports of consumer and investment goods will cause a significant deterioration of external accounts.
WEAKNESSES The country has suffered from its landlocked status, which has also given it a pivotal role in illicit traffic of various kinds. ● The economy is very exposed to fluctuations of world prices for farm products and to the economic trend in Argentina and Brazil. ● The public sector has been bloated and inefficient. ● The banking system has remained weakened after a series of crises. ● Governance problems, the extent of corruption and the lagging pace of structural reforms have had a deterrent effect on foreign investors. ● The level of inequality, poverty and insecurity has been a major source of concern. ●
However, considering the continued consolidation of public sector finances in particular, the country should be able to count on an extension of its IMF agreement beyond its end-2005 expiry date, which will allow it to benefit from financial backing and foreign investment inflows. The country has nonetheless remained weak and will only succeed in bolstering its macroeconomic situation by undertaking reforms, in particular, the restructuring of state-owned companies and the banking sector. However, with President Duarte Frutos, whose term in office ends in August 2008, not enjoying a parliamentary majority, progress on structural reforms could thus prove laboriously slow.
189
THE AMERICAS MAIN ECONOMIC INDICATORS US$ billions
2001
2002
2003
2004
2005(e) 2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2.7 7.3 -3.3 1.9 2.5 -0.6 -0.3 -3.9 40.8 12.6
-2.3 10.5 -3.1 1.9 2.1 -0.3 0.1 1.6 52.5 16.9
3.8 14.2 -0.1 2.2 2.5 -0.3 0.1 2.1 53.1 13.5
4.0 4.3 2.1 2.8 3.2 -0.4 0.0 0.3 46.6 12.1
3.0 6.5 0.0 3.1 3.9 -0.7 -0.2 -2.8 49.0 10.3
3.1 9.5 0.0 3.2 4.1 -0.9 -0.3 -4.5 48.2 11.0
3.3
3.4
4.6
4.1
3.8
3.6
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview Paraguayan imports aim only partially to meet domestic demand. The bulk is officially meant for re-export, but is usually smuggled to neighbouring countries, in particular Brazil. Paraguay joined Mercosur in 1991 but, in order to access this common market, had to relinquish its RLDC (relatively less developed country) status within LAIA and raise its customs duties on most goods in line with the common external tariff phased in by the four member countries.
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Means of entry On the whole, Paraguay has a very open trade policy under which imports of only a handful of products are officially prohibited. The new tariff code in force since January 2005 seeks to facilitate customs clearance and, in theory, to improve inspection procedures as part of the government’s publicly declared goal of combating smuggling and infringement – activities which the country has got down to a fine art. Export documents must first be declared to the Paraguayan consulate in the country of origin of the goods and the relevant stamp duty paid. Mandatory inspections, by an approved firm, of goods exported to Paraguay were abolished in 1999. Law 194
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190
unduly protects the interests of Paraguayan agents, representatives and importers and, as such, constitutes a punitive non-tariff barrier. Attitude towards foreign investors Foreign trade regulations are fairly investment friendly. As a rule, there are restrictions on foreign and private investment in government monopoly sectors such as fixed telephony, drinking water supply and purification, electricity, cement manufacture and crude oil imports. Paraguayan legislation permits international arbitration for the settlement of disputes between foreign investors and the state. Investors can choose between ICSID and the arbitration boards set up through UNCITRAL. Paraguay is a member of the Inter-American Convention on International Commercial Arbitration, the Inter-American Convention on Extraterritorial Validity of Foreign Judgements and Arbitral Awards, and the World Bank’s MIGA. It has also ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Mercosur’s arbitration court has been based in the Paraguayan capital since 2004.
■
Foreign exchange regulations There are no exchange controls. The most widely used currency is the US dollar.
■
PARAGUAY OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 60 ■ Public consumption 5 ■ Investment 14
Exports: 32% of GDP
Imports: 47% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
500
800 700 600 500 400 300 200 100 0
400 300 200 100 0 Brazil
Uruguay Switzerland Argentina
2
USA
Brazil
Argentina China
USA
Japan
IMPORTS by products ■ All food items 12% ■ Fuels 17% ■ Chemical products 18% ■ Other manufactured goods 23% ■ Capital goods and transport equipment 28% ■ Miscellaneous 2%
EXPORTS by products ■ All food items 77% ■ Agricultural raw materials 9% ■ Manufactured products 14%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
Paraguay 4,690 1,110 0.755 45.4 58 38.4 46 34.6
Regional average DC average 7,130 3,280 0.795 44 77 31 170 67
4,300 1,280 0.697 33 43 31 112 28.4
191
THE AMERICAS
Peru Population (million inhabitants) GDP (US$ million)
27.1 68,630
Short-term: B
Coface analysis
Medium-term: Moderately high risk
STRENGTHS ● Peru boasts vast mineral wealth (gold, copper, zinc) that has allowed it to capitalize on high raw material prices. ● The country also boasts abundant energy, agricultural and fishing resources as well as an exceptional national heritage. ● It has pursued tight fiscal and monetary policies. ● External debt ratios have been improving as a result of GDP and export growth. ● Foreign exchange reserves have been steadily increasing and have reached very comfortable levels (nearly ten months of imports).
192
RISK ASSESSMENT Although growth should sag after the robust expansion of 2005, it will continue to rest on solid foundations, buoyed by both exports and steady domestic demand. Government authorities have been pursuing tight fiscal policy with IMF backing. However, a public sector debt denominated mainly in dollars has been a source of vulnerability. With the continued consolidation of external accounts, the country has had no difficulty meeting its financing needs, especially via FDI. External debt ratios have continued to improve, with Peru making early repayment to Paris Club creditors in 2005. Moreover, the high levels of foreign currency
WEAKNESSES The country has been vulnerable to exogenous shocks, a downturn of world raw material prices and weather conditions. ● The contrast between a relatively modern sector in the coastal plains and a subsistence sector inland still marks the economy. ● Although declining, external debt ratios are still high. ● Even if the banking system has been growing stronger, the extent of dollarization could jeopardize its stability. ● The gulf between the government’s pragmatic policies and the aspirations of a population largely excluded from the positive effects of economic growth still constitutes a major risk. ●
reserves have substantially reduced foreign currency liquidity crisis risk with the country currently enjoying the confidence of financial markets. It has nonetheless remained exposed to a downturn of world raw material prices and, despite the improvement achieved, the banking system is still weakened by the extent of dollar-denominated deposits and loans. Although the political situation – marked by President Toledo’s relative unpopularity and protest movements – contrasts with the improved economic and financial conditions, the presidential and legislative elections in April 2006 should not fundamentally change the current, relatively tight, economic policy.
PERU MAIN ECONOMIC INDICATORS US$ billions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2005(e) 2006(f )
2001
2002
2003
2004
0.3 -0.1 -2.5 7.0 7.2 -0.2 -1.2 -2.2 51.7 34.3
4.8 1.5 -2.3 7.7 7.4 0.3 -1.1 -2.0 49.7 30.4
3.8 2.5 -1.8 9.0 8.3 0.7 -1.1 -1.8 49.1 26.8
4.8 3.5 -1.1 12.5 9.8 2.7 -0.1 -0.1 45.7 23.3
6.0 2.0 -1.0 13.9 10.6 3.3 0.3 0.3 42.0 22.5
4.8 2.7 -1.0 15.0 12.5 2.6 -0.5 -0.6 40.4 22.7
9.1
9.5
8.9
9.0
9.9
9.7
2
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview The Camisea gas field development should help create a thriving petrochemicals industry in the medium term. Mining is enjoying a boom as a result of the commissioning in 2001 of Antamina, the world’s largest copper and zinc mine. The award of the Las Bambas copper and gold mine concession will increase the sector’s output. Construction is picking up on the back of a vast programme of low-cost housing and will see its medium-term prospects further boosted by the award of roadbuilding concessions. Textiles continue to benefit from the inclusion of apparel in the generalized system of preferences (ATPDEA) granted by the United States to four Andean countries for a four-year period (2002–2006) that might be extended under a freetrade agreement due to be signed in 2006.
■
Attitude towards foreign investors Peru’s legislation offers foreign investors a number of safeguards, including equal rights with domestic investors, the option of signing legal stability agreements, unrestricted transfer of profits, dividends and capital, freedom of enterprise, freedom to import and export etc. Foreign investment is not subject to prior approval. However, investors seeking the benefit of legal stability agreements must be registered with Proinversion, the Peruvian investment promotion agency. Peru has signed the founding charter of the Multilateral Investment Guarantees Agency (MIGA) as well as the original act of the International Centre for Settlement of Investment Disputes (ICSID). It has also ratified the New York Convention on the Recognition and Enforcement of Arbitral Awards. A mutual investment promotion and protection agreement was signed with France on 6 October
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PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 500 450
WORLD Peru
400 350 300 250 200 150 100 50
5
04
ec
-0
04 D
03
04
ec -
ne Ju
D
2
03
ec -
ne Ju
D
-0 ec
Ju ne
1
02 D
-0 ec
Ju ne
00
01 D
ec -
ne
D
Ju
9
00
-9 D ec
Ju ne
8
99
Ju
ne
-9
98 ne
D ec
Ju
97 ne Ju
ec -9 7
0
D
Means of entry The market is open and there are no payment difficulties in respect of imports. The average rate of customs duty is 10.9 per cent. An Andean Community of Nations common external tariff has been agreed for 62 per cent of tariff categories (four rates of duty: 0, 5,10 and 20 per cent), but Peru has asked for it to be replaced by a more open system.
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193
THE AMERICAS 1993 and ratified in February 1996. In respect of taxation, Peru has dual taxation agreements with three countries (Sweden, Canada and Chile) and in August 2005 signed a draft agreement with France, which is due to come into force in early 2006. There
is no difficulty in obtaining a work or residence permit in connection with an investment. Foreign exchange regulations Peru has a floating, but managed, exchange rate.
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OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 60 ■ Public consumption 8 ■ Investment 16
Exports: 18% of GDP
Imports: 18% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
2500
2500
2000
2000
1500
1500
1000
1000
500
500
0
0 USA
UK
China Switzerland Chile
USA
Spain
Chile
Brazil
Colombia
IMPORTS by products ■ All food items 13% ■ Fuels 17% ■ Chemical products 16% ■ Other manufactured goods 23% ■ Capital goods and transport equipment 28% ■ Miscellaneous 3%
EXPORTS by products ■ All food items 21% ■ Fuels 8% ■ Ores and metals 29% ■ Manufactured goods 17% ■ Miscellaneous 25%
STANDARD OF LIVING / PURCHASING POWER Indicators
194
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
Peru 5,080 2,140 0.762 37.2 74 33 67 43
Regional average DC average 7,130 3,280 0.795 44 77 31 170 67
4,300 1,280 0.697 33 43 31 112 28.4
UNITED STATES
United States Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
293.6 11,679,200 39,779
2 Coface analysis
Short-term: A1
STRENGTHS ● Two decades of vigorous growth, great upside potential and a still almighty dollar have sustained investor interest. ● High immigration, great geographic mobility and flexible labour legislation have been conducive to keeping labour supply and demand in balance. ● Research has benefited from the cooperation between laboratories, universities and companies as well as from substantial government financial support making it possible to attract foreign talent. ● The reactivity and flexibility of companies and government authorities have allowed the country to adjust rapidly to changing conditions. ● Strict application of the Sarbanes-Oxley legislation on corporate governance has contributed to economic transparency.
RISK ASSESSMENT Although failing to duplicate the 2004 record, 2005 has nonetheless been another strong growth year. The negative effects of the hurricanes were shortlived and limited geographically. The temporary upsurge of energy costs had little effect on household consumption, moreover bolstered by improvement in the employment situation, increases in non-wage earnings and appreciation of property holdings. Investment and exports have retained their dynamism. In 2006, economic activity will remain dynamic despite a moderate slowdown. Increased public
WEAKNESSES A lack of domestic savings has resulted in large external deficits exposing the country to the possibility of painful economic and financial adjustments. ● Inadequate maintenance of road and rail networks and the separation of electric power networks have affected competitiveness. ● Unequal access to education and social protection – contingent on the wealth of the state or the company where people live and work – has been widening income dispersion. ● The ultimate aging of the population has jeopardized the survival of the federal medicare and social security programmes intended to cover the health and retirement of those over 65. ● The underlying financing of many pension funds and increasing cost of health coverage have weakened companies. ●
spending linked to reconstruction of states on the Gulf of Mexico as well as the holding of mid-term elections should largely offset the negative effects of continued interest rate increases. While continuing to grow at a good rate, household consumption will sag somewhat, accompanied by a concomitant increase in the savings rate attributable to the cooling of the property market. The export boom will continue, buoyed by more robust economic conditions in Europe and Japan. That boom will nonetheless not suffice to prevent the current account deficit from widening. Investment in industrial and computer equipment
195
THE AMERICAS MAIN ECONOMIC INDICATORS % Economic growth Consumption (var.) Investment (var.) Inflation Unemployment rate Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)
2001
2002
2003
2004
0.8 2.5 -4.2 2.8 4.8 3.7 -0.5 58.7 -5.4 -2.7 -3.8
1.6 2.7 -8.9 1.6 5.8 1.8 -3.8 60.8 -2.3 3.4 -4.5
2.7 2.9 1.3 2.3 6.0 1.2 -5.0 62.5 1.9 4.4 -4.8
4.2 3.9 9.4 2.7 5.5 1.7 -4.7 63.7 8.6 10.7 -5.7
2005(e) 2006(f ) 3.6 3.5 9.0 3.3 5.1 3.6 -3.7 64.3 7.6 6.3 -6.3
3.4 2.8 7.6 2.9 4.9 4.6 -4.0 65.1 8.5 5.9 -6.5
e = estimate, f = forecast
will continue its dynamic growth, notably in the mining and extractive sectors. The company financial situation improved further, even if less markedly than in the past, as evidenced by the decline in bankruptcies in 2005 (down 2 per cent) and the good level of the Coface payment incident index. Thanks to production capacity cutbacks and the continued high purchasing power of households, companies have had greater leeway in setting their prices. Several sectors,
including chemicals, paper, energy, electric equipment, airplane manufacturing and hotel, have thus been able to maintain good solvency despite increasing energy and raw material costs. Conversely, where competition has been intense, as in the car industry, air transport, toys and furniture, the situation has remained difficult. The situation should stabilize at a good level in 2006. A slight rise in payment incidents remains nonetheless possible due to the knock-on effects of the cooling of the property market.
MAIN ECONOMIC SECTORS Retail Food retailers have had to contend with the dominance of Wal-Mart. That has prompted resumption of the concentration process for purposes of enhancing the capacity of other retailers to stand up to Wal-Mart. In generalist retailing, the successful merger between K-Mart and Sears and the capacity of Target to compete with Wal-Mart have stabilized the situation. Housing equipment, dominated by the Home Depot and Lowe’s tandem, should benefit from the reconstruction in southern states. Continued robust consumption in 2006 should benefit the sector.
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Car industry General Motors (GM) and Ford, handicapped by heavy social costs and declining market share,
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196
registered very poor results. More generally, the industry has suffered from the soaring raw material and energy prices, which have contributed to forcing carmaker suppliers, like Delphi, into bankruptcy. The Delphi bankruptcy prompted the UAW union to make concessions on health coverage for GM active and retired staff. In the near term, large discounts should not be enough for Ford and GM to retake market share. Steel Steelmakers now have several years of good earnings performance behind them, allowing them to consolidate their balance sheets. Increasing demand from American industry and emerging markets like China, together with the resulting price increases, spurred the upturn. The reduction of
■
UNITED STATES production capacity resulting from the sector’s increasing concentration should continue to underpin prices in 2006. However, high raw material and energy prices will continue to exert pressure on margins.
blades and other innovative products will continue to provide comfortable margins. Microsoft’s new Vista operating system could spur additional equipment purchases. Textiles Despite the influx of imports from China (representing 29 per cent of American textile and clothing imports) and the damage caused by the hurricanes, textile production stabilized in 2005. Continued productivity gains should allow the survivors in that industry to remain viable, even if clothing continues to encounter greater difficulty than other segments.
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Telecommunications In 2006, incumbent fixed telephony operators will continue to face competition from mobile telephony, cable and internet telephony operators. While the rapid pace of technological change has created opportunities for some parts manufacturers, it has weakened those unable to adapt. The concentration in fixed telephony has come to an end with the acquisitions of MCI by Verizon and of ATT by SBC. Much the same has happened in the cable and mobile segments. Internet telephony has been attracting new actors eager to gain a foothold.
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Computers After posting greater-than-expected growth in 2005, demand for components and computers should remain strong in 2006. Margins will continue to shrink on basic office computers. High-end server
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2
Paper Prices for many types of paper rose in 2005. There has been some concern, however, that stocks could become too large and thus trigger a price decline in 2006. Since raw materials, energy and shipping will remain costly, margins will probably shrink. Newsprint, where the downward demand trend has generated substantial overcapacity, should suffer more than other types of paper.
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PAYMENT AND COLLECTION PRACTICES Payment Exporters should be wary about the provisions of sales contracts payable on credit and ensure that the payment terms they obtain are appropriate to the context. Cheques and bills of exchange are very basic payment devices that do not allow creditors to bring actions for recovery in respect of exchange law (droit cambiaire). Cheques are widely used but, as they are not required to be covered at their issue, offer relatively limited guarantees. Account holders may stop payment on a cheque by submitting a written request to the bank within 14 days of the cheque’s issue. Moreover, in the event of default, payees must still provide proof of claim. Although more difficult to obtain, bank cheques drawn directly on a bank’s own account provide greater security as they constitute a direct undertaking to pay from the bank.
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Bills of exchange and promissory notes are less commonly used and offer no specific proof of debt. The open account system is only justified after a continuing business relationship has been established. SWIFT transfers are widespread and the majority of American banks are connected to the system. SWIFT funds transfers are fairly quick and easy to make and are particularly suitable where trust exists between the contracting parties, as the seller is dependent on the buyer acting in good faith and ordering the transfer of funds. Debt collection Since the American legal system is complex and, especially as regards lawyers’ fees, costly, it is advisable to negotiate and settle out of court with customers wherever possible or else to hire a collection agency. Parties can seek mediation through the relatively informal system of alternative
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197
THE AMERICAS dispute resolution (ADR) and in so doing avoid costly and lengthy court cases. The judicial system comprises two basic types of court: district courts at the federal level and circuit or county courts under the jurisdiction of each state. The vast majority of proceedings are heard by state courts, which apply state and federal law to disputes falling within their jurisdictions (ie legal actions concerning persons domiciled or resident in the state). Federal courts, on the other hand, rule on disputes involving state governments, cases involving interpretations of the constitution or federal treaties, and claims above US$75,000 between citizens of different US states or between a US citizen and a foreign national or foreign state body or, in some cases, between plaintiffs and defendants from foreign countries. A key feature of the US judicial system is the pre-trial ‘discovery’ phase whereby each party may demand evidence and testimonies relating to the dispute from the adversary before the court hears the case. During the trial itself, judges give plaintiffs and their lawyers considerable leeway to produce
pertinent documents at any time and conduct the trial in general (prosecution-orientated procedure). The ‘discovery’ phase can last several months, even years, entail high costs due to each adversary’s insistence on constantly providing pertinent evidence (argued by each party), and involve various means – like examinations, requests to provide supporting documents, witnesses’ testimonies and reports by detectives – before submitting them for court approval during the final phase of the proceedings. Another feature of the US procedural system is that litigants may request a civil or criminal case to be heard by a jury (usually made up of 12 ordinary citizens not familiar with legal aspects – ‘twelve good men and true’ according to the popular definition of ‘jury’), whose task is to deliver a verdict based overall on the facts of the case and the evidence produced during the proceedings. For especially complex, lengthy or expensive litigation, as in the case of insolvency actions, courts have been known to allow creditors to hold the professionals (eg auditors) counselling the defaulting party liable, where such advisors have demonstrably acted improperly.
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD United States
250
200
150
100
50
Ju
ne Ju
198
D
93 ec -9 3 ne 9 D 4 ec Ju 94 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 9 D 7 ec -9 Ju 7 ne 9 D 8 ec -9 Ju 8 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 0 D 1 ec -0 Ju 1 ne 0 D 2 ec Ju 02 ne 0 D 3 ec Ju 03 ne 0 D 4 ec Ju 04 ne 0 D 5 ec -0 5
0
URUGUAY
Uruguay Population (million inhabitants) GDP (US$ million)
3.4 13,215
2
Short-term: B
Coface analysis
Medium-term: High risk
STRENGTHS ● Uruguay has substantial farm resources. ● The country has benefited from its participation in Mercosur and from international financial community backing. ● Uruguay enjoys a stable democracy and good social indicators. ● Government authorities have attempted to ally progress on reforms (taxation, social security, banking system) with social strategy.
RISK ASSESSMENT Economic growth should sag in 2006 while remaining at satisfactory levels, driven by consumption and investment. High oil prices will continue to be the primary cause of inflation, which has nonetheless been easing. Exports will virtually stagnate amid moderating world prices for raw materials produced by Uruguay. Furthermore, the country is highly dependent on oil imports notwithstanding the agreement on preferential terms concluded with Venezuela in 2005. Although that dependence has led to deterioration of external accounts, the country should easily meet its financing needs through FDI inflows and borrowing abroad. President Tabaré Vazquez, leading a left-wing coalition since March 2005, has continued the
WEAKNESSES The country has been very dependent on the economic fortunes of its two powerful neighbours, Argentina and Brazil. ● With agriculture predominating, exports have not been very diversified. ● High public and external debt has limited the government’s room for manoeuvre. ● The banking system is still shaky and in need of restructuring. ● Increasing poverty and high unemployment have caused deterioration of the social fabric. ●
previous administration’s pragmatic economic policy. Uruguay, moreover, obtained a standby loan from the IMF in June 2005. Although that should allow the country to meet its obligations more easily, it has remained financially shaky, with public sector debt representing about 70 per cent of GDP and both public and foreign debt ratios among the highest for emerging countries. Sectoral reforms and policies are intended to make the economy more competitive and increase foreign investment inflows. Due to dissensions between the coalition’s reformist and radical wings, authorities have been working to combine those reforms with expanded efforts on behalf of education and the most impoverished individuals.
199
THE AMERICAS MAIN ECONOMIC INDICATORS US$ billions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2001
2005(e) 2006(f )
2002
2003
2004
- 3.4 3.6 -4.3 2.1 2.9 -0.8 -0.5 -2.7 81.5 44.1
-11.0 25.9 -4.1 1.9 1.9 0.0 0.4 3.1 96.8 48.6
2.2 10.2 -3.2 2.3 2.1 0.2 -0.1 -0.5 110.8 52.6
12.3 7.6 -2.2 3.0 3.0 0.0 -0.1 -0.8 98.6 44.6
6.0 6.5 -1.3 3.5 3.9 -0.4 -0.5 -2.8 79.9 40.1
4.0 5.5 -1.2 3.6 4.2 -0.6 -0.7 -3.5 72.8 37.4
8.0
3.3
7.2
6.6
6.1
6.0
-
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview Uruguay suffered a severe crisis in 2001–2002 that affected all sectors of the economy. Economic activity has picked up since 2003. Private sector investment has risen and growth sectors include agri-foods, services (in particular logistics) and new technologies such as software.
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Means of entry The Uruguayan market is open, although complex customs clearance procedures and high duties hamper the flow of imported luxury products. Goods can be freely imported into the country, with the exception of military equipment, second-hand vehicles and spare parts, meat, livestock etc. A number of non-tariff barriers remain, but are to be gradually lifted within the framework of Mercosur. Restrictive health controls on all foodstuffs are one such barrier. The customs union currently applies to 85 per cent of tariff categories, but excludes cars, spare parts and sugar. Customs duties and levies are calculated on the CIF value and vary between 0 per
■
200
cent and 23 per cent. There is also a raft of levies, including a port tax, a fee payable to the Bank of the Republic of Uruguay, VAT and an ad hoc levy on non-essential goods (IMESI). It is advisable to use documentary credit for payments. Attitude towards foreign investors Foreign investment is unrestricted and not subject to a declaration. All sectors are open to foreign investment, except oil refining, fixed telephony and electricity generation. The Foreign Investment Act 1998 offers important financial incentives, including exemption from tax and customs duties. Free zones open to Mercosur members are starting to flourish.
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Foreign exchange regulations There are no restrictions on currency inflows or outflows. The US dollar is the de facto benchmark currency, with 85 per cent of loans and deposits denominated in dollars. The peso has been floating freely since July 2002. There are no exchange controls for import payments, but all foreign exchange transactions above US$10,000 must be declared. No authorization is required for capital and profit transfers.
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URUGUAY OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 59 ■ Public consumption 10 ■ Investment 11
Exports: 26% of GDP
Imports: 23% of GDP
MAIN DESTINATIONS OF EXPORTS
2
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
500
600
400
500 400
300
300 200
200
100
100
0
0 Brazil
USA
Argentina Germany China
Argentina
Brazil
Russia
USA
China
IMPORTS by products ■ All food items 13% ■ Fuels 22% ■ Chemical products 22% ■ Other manufactured goods 21% ■ Capital goods and transport equipment 16% ■ Miscellaneous 6%
EXPORTS by products ■ All food items 52% ■ Agricultural raw materials 6% ■ Chemical products 6% ■ Other manufactured goods 33% ■ Miscellaneous 3%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
Uruguay 7,980 3,820 0.84 33.5 93 24.4 280 110.1
Regional average DC average 7,130 3,280 0.795 44 77 31 170 67
4,300 1,280 0.697 33 43 31 112 28.4
201
THE AMERICAS
Venezuela Population (million inhabitants) GDP (US$ million)
25.7 85,394
Short-term: C
Coface analysis
Medium-term: High risk
STRENGTHS ● The country has substantial oil, gas and mineral resources with notably considerable heavy oil reserves. ● For energy-dependence and geographicproximity reasons, the United States is still the main market for Venezuelan oil products, political discord notwithstanding. ● Oil export earnings have afforded the country the means to extend its regional political influence (Caribbean region, Mercosur). ● The foreign debt burden has been moderate and declining.
RISK ASSESSMENT After two recession years, which followed the general strike at the 2001–2002 turning point, the economy benefited from a dynamic catch-up phase in 2004 thanks to very favourable oil market conditions. In 2005, growth was robust, buoyed by soaring barrel prices that spurred resolutely expansionary fiscal policy. With oil prices remaining high in 2006, growth will continue to derive support from public spending and use of surplus PDVSA foreign exchange earnings allocated to the national development fund (FONDEN). The very liquid market has been generating inflationary pressures, which subsidized prices and a reduced VAT rate have nevertheless mitigated. The external financial situation is still comfortable. Although exchange
202
WEAKNESSES The PDVSA national oil-company’s production has remained constrained since the 2002 strikes, and the government policy has delayed the investments needed to increase its capacity. ● The government’s interventionism has had a negative impact on private investment and on confidence in business circles. ● A policy of growth stimulation through public spending, the weakening of PDVSA and the private sector have made the economy increasingly vulnerable to a decline of oil prices. ●
controls are still in force to stem capital flight, importers have benefited from specially facilitated access to foreign currency. Despite a relatively unpredictable business environment, companies have nonetheless been benefiting from buoyant economic conditions that have fostered good payment behaviour. In the longer term, the outlook has appeared disquieting. The oil wealth redistribution policy has exacerbated the country’s vulnerability to an always possible hydrocarbon price decline, and the increasing control the government exerts over the economy has been discouraging private initiative while stoking political tensions. However, with the opposition demonstrating little capacity to get organised thus far, the coming election end 2006 should preserve continuity.
VENEZUELA MAIN ECONOMIC INDICATORS 2005(f ) 2006(f )
US$ billions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2.8 12.4 -4.4 26.7 19.2 7.5 2.0 1.6 31.4 16.9
-8.9 22.5 -3.6 26.8 13.4 13.4 7.6 8.2 41.1 16.4
-9.4 31.1 -5.9 27.2 10.7 16.5 11.4 13.7 47.8 13.2
17.9 21.7 -1.9 38.7 17.3 21.4 13.8 12.7 34.6 9.1
9.0 16.0 0.2 51.2 24.4 26.8 19.0 15.3 30.3 7.3
7.0 13.0 -3.5 52.4 30.8 21.7 13.9 9.4 25.4 6.8
4.0
4.6
10.2
7.6
6.3
5.6
2
f = forecast
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 500 450
WORLD Venezuela
400 350 300 250 200 150 100 50
ne
93 ec -9 3 ne 94 D ec -9 Ju 4 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 9 D 7 ec Ju 97 ne 98 D ec Ju 98 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 0 D 1 ec Ju 01 ne 0 D 2 ec Ju 02 ne 0 D 3 ec Ju 03 ne 04 D ec Ju 04 ne 0 D 5 ec -0 5
0
D
Means of entry Apart from exchange controls, a number of tariff and non-tariff measures remain in place. These include multiple licensing procedures and discretionary licensing (in particular for cheese and milk powder), fewer licence awards, stringent health restrictions on apples and potatoes, compulsory product labelling with mention of origin, discrimination against imported products and special treatment under foreign exchange rules for South American products traded within the framework of the Latin American Integration Association (ALADI, Asociación Latinoamericana de Integración).
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Attitude towards foreign investors The 2000 constitution gives foreign and domestic investors equal rights and duties. In this regard, the government has not spared foreign investors in its 18-month-long drive against private oil companies, cattle-breeding businesses and so-called tax evasion (higher tax rates and royalties, payment of back taxes, 48-hour company closures, modification of terms of contract, confiscation of land for possession of supposedly bogus titles). This attitude is sure to give Western investors cold feet,
■
Ju
Market overview Exchange and price controls have been in force since February 2003, but their application has improved to such an extent that they no longer obstruct the normal flow of goods into the country. However, difficulties might arise in connection with dividend transfers, royalty payments or payment for technical assistance services. On the other hand, maximum retail prices for foodstuffs, consumer goods, cement and waste processing have in some cases remained at 2002 levels, even though inflation between end-2002 and end-2005 approached 65 per cent. Intellectual property protection remains patchy, especially for textiles and pharmaceuticals.
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European wines and spirits, nevertheless, managed to get equal treatment in the first half of 2005. In the field of government procurement, preferential measures have been adopted in favour of local companies that show value added to GDP of over 20 per cent. This device is tantamount to knocking 20 per cent off the value of a local bid before comparing it with foreign bids.
Ju
CONDITIONS OF ACCESS TO THE MARKET
203
THE AMERICAS despite significant levels of investment in oil and gas, alumina, banking and telecommunications since 1998. A reciprocal investment protection
agreement between France and Venezuela was nevertheless ratified by the Venezuelan government in early 2004.
OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 59 ■ Public consumption 6 ■ Investment 8
Exports: 31% of GDP
Imports: 15% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
3500
20000
3000 15000
2500 2000
10000
1500 1000
5000
500 0
0 USA Netherlands Dominican Colombia Mexico Antilles Republic
USA
Colombia Brazil
Mexico
Spain
IMPORTS by products ■ All food items 17% ■ Chemical products 21% ■ Other manufactured goods 20% ■ Capital goods and transport equipment 36% ■ Miscellaneous 6%
EXPORTS by products ■ Fuels 82% ■ Manufactured goods 12% ■ Miscellaneous 5%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
204
Venezuela 4,750 3,490 0.772 36.3 88 32.2 111 60.9
Regional average DC average 7,130 3,280 0.795 44 77 31 170 67
4,300 1,280 0.697 33 43 31 112 28.4
Asia 3
Trade and Consumption Drive China’s Growth
206
The Range of Country @ratings in Asia
209
Afghanistan Australia Bangladesh Cambodia China Hong Kong India Indonesia Japan Laos Malaysia Mongolia Nepal New Zealand Pakistan Papua New Guinea Philippines Singapore South Korea Sri Lanka Taiwan Thailand Vietnam
215 216 219 220 221 225 229 232 236 240 242 245 247 248 251 254 256 260 263 266 269 273 276
205
OUTLOOK FOR 2006
Trade and Consumption Drive China’s Growth Experts from Oxford Analytica, Oxford
hina’s economy grew faster than expected in 2005, and will maintain strong growth of at least 8.5 per cent in 2006. Declining profitability suggests an imminent downturn in industrial production and investment, but structural factors indicate continued rapid medium-term growth. Real GDP growth is expected to be 9.4 per cent for 2005, only slightly down from the 9.5 per cent recorded in 2004.
C
KEY INSIGHTS ➙ GDP will grow at least 8.5 per cent in 2006. ➙ There will be a sharp fall in industrial profits, and a consequent slowdown in industrial production from 16 per cent in 2005 to 12 per cent in 2006. ➙ The trade surplus will rise to US$150 billion in 2006. ➙ Consumption will grow, reflecting high levels of liquidity. ➙ Monetary policy will stay essentially unchanged. ➙ Currency policy will hold, with little significant movement in the RMB–USD rate. However, about one-fifth of growth has come from a surge in the trade surplus, which more than tripled from the US$32 billion recorded in 2004. Another 10–15 per cent of growth came from increases in inventories. Domestic demand is thus weaker than in 2003–2004, and will weaken further in 2006.
206
Weak profitability. Many manufacturing sectors have excess capacity, leading to fierce price wars, eroding profits. Reduced profitability can be
inferred from the discrepancy between input prices, which rose at an average rate of 6–10 per cent in 2005, and consumer prices, which rose by only about 2 per cent (with rises in manufactured goods prices generally zero or negative). This gap between high input prices and low consumer price index (CPI) inflation has been a persistent feature of the economy since 2003. Despite this, official profit data show healthy increases. This is probably because of creative accounting, for example, booking inventories as sales. Evidence of a profit squeeze comes from foreign companies, which generally report more reliably. In the first three-quarters of 2005, foreigncompany industrial profits rose less than 3 per cent, compared with 25 per cent for domestic enterprises. At the same time, inventories have been growing at an average rate of over 21 per cent since the last quarter of 2004, well above growth in nominal GDP. Export reliance. In the absence of strong domestic demand, producers have increasingly relied on exports: ● ●
●
The merchandise trade surplus (US$32 billion in 2004) will exceed US$100 billion in 2005. Demand in key export markets – notably the United States – appears robust and the trade surplus can be expected to rise to around US$150 billion in 2006. However, the major contributor to this increased surplus in 2005–2006 will be reduced import
TRADE AND CONSUMPTION DRIVE CHINA’S GROWTH demand, reflecting a slowing pace of investment, implying lower demand for raw materials.
alter its lending targets for specific industries, a policy that serves as its main monetary tool.
Factors. On balance, an industrial slowdown will have the larger impact on growth, and real GDP will grow 8.5 per cent in 2006. However, this forecast may prove conservative. Against cyclical factors, which are mostly negative, structural factors favour continued strong growth in the medium term:
Currency policy. On July 21, the renminbi was revalued by 2.1 per cent, to a new rate of RMB8.1 to the US dollar. At the same time, the government announced that the currency’s value would henceforth be set with reference to a basket of currencies. However, the RMB–USD rate subsequently scarcely moved. China will move to a genuine basket, and hence a variable rate against the US dollar, within the next few years, but the timing will depend on the development of hedging instruments, to enable domestic banks to manage their foreign-exchange risk. The government will resist political pressure for significant change in the RMB–USD rate in 2006.
●
●
●
Demographic bulge. The biggest age cohort today, numbering 125 million, is the 15–19 year-old group that is preparing to enter the labour force. This demographic bulge supports further growth in labour-intensive industry. Production shift. Between 1998 and 2005, the state sector’s share of business output fell by 13 percentage points, to 33 per cent, while the private sector’s share rose by 10 points, to 45 per cent (foreign enterprises account for the rest).This shift, which produces a one-off productivity gain, is likely to continue at a rapid pace for the next four or five years, before decelerating. Urbanization. Approximately 100 million people will move from the countryside to the cities per decade for the next two decades. Urbanization provides a two-fold boost: to investment, as housing and infrastructure needs to be built for new residents; and consumption, as new city-dwellers adopt more intensive urban spending habits.
Fiscal policy. The Ministry of Finance intends to keep the budget deficit constant in nominal terms, at around RMB300 billion per year. As revenue growth is quite robust, this target is easily achievable, even with significant planned increases in expenditure on health, education and rural subsidies. Structural reforms. The principal structural reforms will be in the financial sector. Bank reform continues, with a focus on bringing the biggest state-owned banks to the stock market: ● ●
In light of these positive structural factors, the risk to the 8.5 per cent forecast for 2006 is on the upside: growth could be stronger than forecast, but is unlikely to be much weaker. Monetary policy. The People’s Bank of China (PBoC) has a moderately restrictive monetary policy that aims to prevent speculative excess in both industry and construction, and to keep CPI inflation below 3 per cent. This general stance is likely to remain unchanged in 2006, and there will be no change in the main interest rates – 2.25 per cent and 5.58 per cent for one-year deposits and loans respectively. However, the central bank may
3
China Construction Bank listed in Hong Kong in November, raising US$9.2 billion. In 2006, Bank of China and Industrial and Commercial Bank of China are expected to list, raising similar amounts of new capital.
All three banks have lined up strategic investors (mainly large multinational financial institutions) that committed to buying 10–20 per cent stakes prior to stock market listing. The other main structural reform is in the domestic (A-share) stock market, where new listings are on hold until mid-2006 at the earliest. Previously, about 70 per cent of shares in domestically listed firms were non-exchangetradable state or legal person shares. After a successful pilot in the summer of 2005, all listed
207
ASIA firms are now converting these shares into exchange-tradable A-shares. CONCLUSION Economic activity will slow somewhat in 2006 as industrial profits, production and investment fall.
208
However, another strong increase in the trade surplus, and modest growth in consumption, will ensure that official GDP growth is 8.5 per cent. In the medium term, structural factors are positive but industry will probably see a further deterioration of profitability because of excess capacity.
The Range of Country @ratings in Asia Sylvia Greisman, Yves Zlotowski and Olivier Oechslin Coface Country Risk and Economic Studies Department, Paris
COUNTRY @RATING SCALE
HIGHEST RISK
Asia, excluding Japan - Economic growth and credit risk
8% 7%
C
300
7.3%
7.1%
6.9%
6.7%
6.5% 6.1%
3
6.8%
250
6.0%
6%
B
Emerging Countries A4 A3
World A2
Industrialized Countries A1
CIS Subsaharan Africa
Latin America Near and Middle East
Central Europe Emerging Asia
European Union (15) Japan North America
LOWEST RISK
The regional country risk @rating represents an average of country @ratings weighted according to their contribution to the region’s production.
Country @ratings measure the average level of shortterm non-payment risk associated with companies in a particular country. They reflect the extent to which a country’s economic, financial and political outlook influences local companies’ financial commitments. They are thus complementary to @rating credit opinions on companies. The quality of risks has remained good on average despite high oil and raw material prices and intense competition. In Japan, the return to stronger growth has firmed up, buoyed by exports to both Asia and the United States and by company investment. Restructuring efforts in the industrial and financial areas have bolstered company solvency. Delayed effects of the yen depreciation should make it possible to continue that good performance in 2006. In the region’s emerging countries, although companies again benefited from robust growth in
200
5%
4.4%
4%
150 3.1%
3%
100
2% 50
1%
0
0% 1997
1998
1999
2000
2001
2002
2003
2004
2005
2006 (p)
2005, they had to contend with rising raw material prices and stiffer competition, which generated severe pressure on margins. Despite that less favourable context, payment incident frequency was nonetheless low. The average level of risk is expected to remain stable in 2006, far below the emerging country average. Only three country ratings changed. Financial vulnerability and political tensions prompted the downgrade of the Philippines’ rating from A4 to B. With sovereign risk easing, however, the new rating was subsequently positive watchlisted. Sri Lanka’s B rating, meanwhile, was negative watchlisted due to deterioration of the country’s financial situation, notably attributable to high oil prices and heightened political tensions. Mongolia registered the only rating upgrade, improving from D to C, with the economy benefiting from the upward trend of raw material prices. China continues to be a key economic engine for the region with growth still as dynamic as ever and an excellent financial situation buoyed by a
209
ASIA growing current account surplus. Credit risk has been appreciable, however, amid a sharp decline in company margins. China’s dynamism has, moreover, begun to have a negative effect on conditions in East Asian economies, which have been suffering to varying degrees from China’s competitive advantage on prices as its specialization moves progressively upmarket. The slowdowns observed – although generally limited in scope –
have, thus, all been mainly attributable to poorer export performance, associated with the loss of market share to China’s benefit. To meet that challenge companies have been delocalizing their production and redirecting their sales to the Chinese market, or moving upmarket to preserve their advantages in Western markets. Government authorities, moreover, have been making efforts to renew infrastructure and spur innovation and
COFACE MAP OF COUNTRY @RATINGS
210
THE RANGE OF COUNTRY @RATINGS IN ASIA diversification. Those adaptation strategies should enable local companies to remain among the most solvent in emerging countries. Unlike East Asian countries, Indian subcontinent economies (India, Pakistan, Bangladesh) have, in general, succeeded in coping with both Chinese competition and the dismantling of the multifibre arrangement. They have had little difficulty competing on price and have even benefited from the move upmarket of Chinese
products. India, moreover, enjoys very significant competitive advantages in services and has benefited from a rapid developing middle class. Growth should thus remain high in 2006. The financial situation has nonetheless been generally shakier in those countries than it has been in East Asia with the current account deficit widening amid rising oil prices. Risks linked to the company environment have nonetheless persisted in some cases in Asia with the gap still wide between countries like Singapore and
COFACE MAP OF MEDIUM- AND LONG-TERM COUNTRY RISK
3
211
ASIA Thailand, or Hong Kong and Indonesia as regards governance and transparency, legal system effectiveness and banking system solidity. Countries rated A1 The steady political and economic environment has positive effects on an already good payment record of companies. Very weak default probability. In Japan, economic recovery, restructuring, massive liquidity injections by the central bank and support from government agencies have allowed many companies, particularly exporters, to improve their financial situation despite rising input costs. The upturn has been lagging, however, for smaller subcontractor companies contending with delocalization. The economy should perform well again in 2006 especially with the yen’s decline likely to buoy exports and protect the domestic market. However, sluggish household demand has remained a weakness that has been undermining solvency in some sectors (like the retail trade or hotel-food service sector) and has been hindering recovery in the construction industry. The public works segment, meanwhile, has continued to suffer from the low level of public investment. In Taiwan, weaker demand for electronic goods has affected economic activity. High technology companies have, however, often delocalized to mainland China to capitalize on advantageous labour costs. That movement should allow them to maintain their market position. The payment experience registered by Coface has remained very good even if the margins of high technology companies have been narrowing. The country’s external financial position continues to be very robust. Politically, the status quo should continue in Taiwan’s relations with the mainland, due notably to their increasingly important economic ties. Focused on growth markets, Hong Kong’s exports continue to drive the economy with consumption buoyed by the boom in tourism from mainland China. In that context, the payment experience registered by Coface has remained satisfactory as evidenced by the limited number of payment incidents. Although the economy has
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enjoyed excellent financial health, it has suffered from competition from mainland China. It has, however, retained competitive advantages linked to its sound legal framework, efficient banking system and a stock exchange where Chinese companies have preferred to raise almost all their capital. Government authorities have moreover been pursuing infrastructure-consolidation policy that should enable the territory to retain its position as Asia’s leading trade transit centre. Singapore’s growth has become more moderate with investment stalling amid rising oil prices and less buoyant demand for electronic products. Economic performance has nonetheless remained solid, underpinned by pharmaceuticals and services. The payment experience registered by Coface has been satisfactory despite the lack of financial transparency on the part of smaller companies. The country has benefited from an effective legal system and good governance. Countries rated A2 Default probability is still weak even in the case when one country’s political and economic environment or the payment record of companies is not as good as in A1-rated countries. The overindebtedness crisis afflicting South Korean households has eased, as evidenced by the recovery of private consumption. Investment, constrained by the high level of oil prices, has only been increasing moderately. Thanks to market share gains in China and India and increasing quality competitiveness in the car industry and electronics, exports continue to be an essential economic engine. In that context, the Coface payment incident index has remained below the world average. Export-oriented chaebols have generally consolidated their financial situation. Smaller companies, more dependent on local economic conditions, have benefited from the domestic demand recovery. In Malaysia, despite a slowdown, growth has remained solid thanks to the country’s diversified economy. The electronics sector has continued to drive activity while the more traditional sectors – palm oil, oil and gas – have benefited from the upward world price trend. Private investment
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THE RANGE OF COUNTRY @RATINGS IN ASIA should, moreover, pick up the slack for public sector investment, buoyed by an improved business climate and public sector restructuring. Payment experience has remained good and debt collection has been satisfactory. However, company financial information is still sometimes difficult to obtain. Further progress on governance will be necessary to allow the country to join the ranks of the leading Asian economies. Thailand’s economy has been in a slowdown phase. Drought and fears linked to avian flu have had a negative impact on the farm sector, which employs nearly 40 per cent of the population. Electronics have suffered from less buoyant international demand and from Chinese competition, which has also been affecting the textile sector. The economy is diversified, however, and endowed with a flexible private sector. The slowdown under way should thus be limited. The low Coface payment incident index reflects the progress companies have made in consolidating their financial situation. An ineffective legal system and a lack of transparency on the part of companies continue to mark the business environment. Prime Minister Thaksin Shiwanatra’s election to a second term in office in February 2005 assured political stability and continuity on economic strategy. The security situation has been tenser in the country’s southern regions, with an upsurge in confrontations between the army and Muslim rebels. Countries rated A3 Adverse political or economic circumstances may lead to a worsening of a payment record that is already lower than the previous categories, although the probability of a payment default is still low. In China, investment continues to drive economic activity with slowdowns only affecting the sectors where the risk of overcapacity has been greatest (property and steel). Foreign trade, meanwhile, has also made a positive contribution with exports, spurred by price competitiveness, increasing substantially. Despite those robust economic conditions, company margins continue to narrow due notably to intense competition in the domestic market and rising raw material costs. Increasingly, moreover,
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companies have to self-finance their investments amid a bank credit slowdown. In that context of strained financial performance, an internal or external shock could lead to an upsurge in payment incidents. The ‘minimalist’ yuan revaluation end-July 2005 has in no way affected the Chinese dynamic; in practice, the currency has remained pegged to the US dollar. With increasing current account surpluses and foreign currency reserves, the country continues to enjoy a very robust financial situation. Finally, despite the progress made and its increasing openness, the banking sector has remained risky: the lack of credit selectiveness could affect future portfolio quality. In India, growth has been accelerating thanks to a good monsoon in 2005 and buoyant domestic demand. Higher oil prices have not seemed to be enough to derail that dynamic. The growth has solid foundations thanks to competitive advantages in services (notably information processing and outsourcing), dynamic local companies with international scope and the robust expansion of domestic demand spurred by a rapidly developing middle class. The country’s external financial situation has been comfortable despite the emergence of a current account deficit attributable to increasing oil costs. In that buoyant context, company solvency has improved with the Coface payment incident index near the world average. The country’s fiscal situation is still its main weakness. Structural reforms will be essential if public sector debt is to remain sustainable and the business environment to improve. The prime minister’s commitment to reforms notwithstanding, the government coalition’s heterogeneity has been impeding progress. Countries rated B An unsteady political and economic environment is likely to affect further an already poor payment record. In the Philippines, with a positive watchlisted B rating, economic growth has been in a slowdown phase attributable to the high level of oil prices. Household consumption has continued to underpin economic activity, however, spurred by massive
3
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ASIA private transfers. The payment experience registered by Coface has remained good amid relatively transparent company finances. Although the government’s financial situation continues to be shaky due to its vulnerability to market variations, sovereign risk has nonetheless tended to ease progressively with the public sector debt burden declining and fiscal policy remaining relatively strict. The external financial situation has stood up well: the country has continued to run a substantial current account surplus with its debt ratios in decline and foreign currency reserves increasing. Although President Gloria Arroyo successfully deflected impeachment proceedings, the weakness of her position will complicate matters in implementing fiscal and banking reforms. In Indonesia, the economic recovery has continued, spurred by an investment boom. The growth regime has been shaky amid deterioration of the oil sector and the limited level of foreign investment. Although the country’s economic recovery has doubtless spurred company financial consolidation, the limited availability of financial information, frequent difficulties with debt collection and many deficiencies in debtor–creditor law have nonetheless affected payment behaviour. President Yudhoyono has already made some concrete gains in the campaign against corruption, a nonetheless widespread phenomenon that has affected the business climate. With the country’s good fundamentals, government authorities were
214
able to keep the currency crisis that developed in summer 2005 under control. Public sector debt, sensitive to interest rate variations, and the level of foreign currency reserves will nonetheless bear watching. Politically, a significant level of risk has persisted. Confrontations linked to separatism have declined thanks to new peace accords with the Aceh rebels. However, a wave of terrorist attacks in 2005 underscored the difficulties in combating Islamist networks. In Vietnam, economic growth has been very dynamic, buoyed by an investment boom. The payment experience registered by Coface has been satisfactory thanks to the dynamism of an emerging private sector. Often recent and thus weak, however, private companies have been vulnerable to a possible economic downturn. Financially, FDI, attracted by low production costs, has been covering the country’s financing needs. Foreign exchange reserves have been relatively low with the dong, pegged to the US dollar, weakened by a widening current account deficit. Banking system restructuring has been lagging while the already substantial level of nonperforming loans could increase if credit is not brought under control. The economy has, moreover, been suffering from poor governance with the legal system and regulatory environment remaining deficient.
AFGHANISTAN
Afghanistan Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
21.8 4,708 216
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT After years of war, a catch-up phenomenon, international aid and good harvests allowed Afghanistan to post very high growth in 2005. The growth rate will not be sustainable, however, without a minimum of security, the essential condition for attracting foreign investors. Moreover, the weakness of the central government, which only really controls Kabul and the surrounding area, and the extent of drug trafficking have not been very conducive to improving the security situation. Despite a 21 per cent reduction in cultivable land, opium production has only declined slightly due to good weather conditions and still represents 87 per cent of total world production.
Although the legislative elections of 18 September 2005 proceeded relatively smoothly, the new parliament is nonetheless still very divided along regional, clan and ethnic lines. The allegiance of members of parliament to the central government has been weak with some local leaders controlling financial resources surpassing those of the state, thanks notably to opium traffic. The central government’s fiscal revenues (5.6 per cent of GDP) have thus been among the lowest in the world and cover only 40 per cent of government spending, making the country very dependent on international aid.
3
MAIN ECONOMIC INDICATORS US$ millions
2001/02 2002/03
2003/04
2004/05 2005/06(e) 2006/07(f )
Economic growth (%) Inflation (Kabul, period end rate, %) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign currency reserves (in months of imports)
n/a -43.4 n/a 709 1,645 -936 n/a n/a n/a
28.6 52.1 -0.1 1,291 2,508 -1,217 -33.4 n/a n/a
15.7 10.2 -3.0 1,894 3,796 -1,902 -50.9 n/a n/a
8.0 16.3 -1.2 1,656 3,867 -2,211 -45.0 n/a n/a
13.6 10.0 -0.6 1,893 4,560 -2,667 -44.8 n/a n/a
11.2 8.0 -1.5 1,959 4,912 -2,953 -39.9 n/a n/a
n/a
1.8
3.1
3.9
4.8
5.5
215 *excluding donations
e = estimate, f = forecast
ASIA
Australia Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
Coface analysis
20.1 638,600 31,771
Short-term: A1
RISK ASSESSMENT Economic activity slowed markedly in 2005 due to sagging consumption and a decline in residential investment. In the face of both heavy debt and even small declines in property values, households have been considerably reducing their spending, notwithstanding a sharp increase in employment. In 2006, the economy should be more dynamic amid an improved trend on foreign trade and the firmness of other GDP components. Raw material exports will benefit from increased production and transport capacity and continued high prices. Durable and consumer goods exports will benefit from stabilization of the AUD–USD exchange rate. Household consumption could begin to recover, buoyed by an upturn in the property market and tax
breaks made possible by the public sector’s financial surplus position. Good profitability and bottlenecks in the mining sector, deficient transport infrastructure and the low local-currency cost of imported goods will continue to buoy investment by companies and public institutions. In 2005, the economic slowdown and higher raw material prices affected the company situation. The deterioration of the Coface payment incident index, borne out by an 8 per cent increase in bankruptcies, reflects that trend. Although the mining and metallurgy sectors have been benefiting from high world prices and the food industry from the decline of farm-product prices resulting from normal precipitation levels, traditional manufacturing sectors like textiles, furniture and
MAIN ECONOMIC INDICATORS % Economic growth Consumption (var.) Investment (var.) Inflation Unemployment rate Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)
2001
2002
2003
2004
2.7 2.9 0.6 4.4 6.8 4.9 -0.8 22.1 1.8 -4.2 -2.3
3.8 4.0 15.2 3.0 6.4 4.7 0.3 20.7 0.3 11.9 -4.1
3.5 4.1 9.0 2.8 6.0 4.9 0.8 19.6 -2.6 11.0 -5.9
3.1 5.5 7.5 2.4 5.6 5.4 1.0 17.0 4.1 14.2 -6.4
2005(e) 2006(f ) 2.4 2.7 8.5 2.9 5.1 5.5 1.0 16.0 3.8 9.0 -5.8
3.1 2.8 7.0 2.7 5.2 5.4 0.9 15.0 6.0 6.5 -5.4
216 e = estimate, f = forecast
AUSTRALIA papermaking have been facing foreign competition or sluggish demand that has prevented them from
passing on higher productions costs in sales prices. Overall, 2006 should be a better year.
PAYMENT AND COLLECTION PRACTICES As a former colony of the British crown, Australia’s legal system and legal precepts are broadly inspired by British ‘common law’ and the British court system. On 1 January 1901, the six British colonies formed the dominion of Australia as an independent federated union within the Commonwealth. Payment Bills of exchange and promissory notes are not widely used in Australia and are considered, above all, to authenticate the existence of a claim. Cheques, defined as ‘bills of exchange drawn on a bank and payable on presentation’, are commonly used for domestic and international transactions. SWIFT bank transfers are the most commonly used payment method for international transactions. The majority of Australian banks are connected to the SWIFT network, offering a rapid, reliable and cost-effective means of payment. Moreover, the handling of payments via the client bank’s internet site is becoming increasingly commonplace.
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Debt collection The collection process starts with service of an order to pay via a registered ‘seven-day letter’, reminding the client of his or her obligation to pay the amount due plus any contractually agreed interest penalties or, lacking such a penalty clause, interest at the legal rate applicable in each state. In the absence of payment by the debtor company, and if the creditor’s claim is due for payment, uncontested and over A$2,000 (or after a ruling has been made), the creditor may issue a summons demanding payment within 21 days. Unless the debtor settles the claim within the required timeframe, the creditor may lodge a petition for the winding-up of the debtor’s company, considered insolvent (statutory demand under section 459E of the Corporations Act 2001). Under ordinary proceedings, once a statement of claim (summons) has been filed and where
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debtors have no grounds on which to dispute claims, creditors may solicit a fast-track procedure enabling them to obtain an executory order by issuing the debtor with an application for summary judgment. This petition must be accompanied by an affidavit (a sworn statement by the plaintiff attesting to the claim’s validity) along with supporting documents authenticating the unpaid claim. For more complex or disputed claims, creditors must instigate standard civil proceedings, an arduous, often lengthy process lasting up to two years given the fact that court systems vary from one state to the next. During the preliminary phase, the proceedings are written insofar as the court examines the case documents authenticating the parties’ respective claims. During the subsequent ‘discovery phase’ the parties’ lawyers may request their adversaries to submit any proof or witness testimony that is relevant to the matter and duly examine the case documents thus submitted. Before handing down its judgment, the court examines the case and holds an adversarial hearing of the witnesses who may be cross-examined by the parties’ lawyers. Besides local courts, which hear minor claims not exceeding A$50,000 on average, claims for amounts up to A$750,000 in New South Wales, A$500,000 in Western Australia, A$250,000 in Queensland or A$200,000 in Victoria, for example, are heard either by a county court or a district court, depending on the state. Claims exceeding the aforementioned amounts are heard by the supreme court in each state. As a general rule, appeals lodged against supreme court decisions, where a prior ruling in appeal instance has been handed down by a panel of judges, are heard by the High Court of Australia, in Canberra, which may decide, only with ‘leave’ of the court itself, to examine cases of clear legal merit. The right of final recourse before the Privy Council in London, was abolished on 3 March 1986 (Australia Act 1986).
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217
ASIA Lastly, although the Australian legal system does not have commercial courts per se, in certain states, such as New South Wales, commercial sections of the district or supreme courts offer fasttrack proceedings for commercial disputes. Since 1 February 1977, federal courts have been created alongside the state courts and established in each state capital. The federal courts have wide powers to hear civil and commercial cases (like company law, winding up proceedings) in addition
to matters concerning fiscal, maritime, intellectual property, consumer law and so on. In certain cases, the jurisdictional boundaries between state and federal courts may be indistinct and this may lead to conflicts depending on the merits of each case. Arbitration and mediation proceedings may also be used to resolve disputes and obtain out-ofcourt settlements, often at a lower cost than through the ordinary adversarial procedure.
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Australia
250
200
150
100
50
218
ec -9 5 ne 96 D ec Ju 96 ne 9 D 7 ec Ju 97 ne 9 D 8 ec -9 Ju 8 ne 9 D 9 ec Ju 99 ne 0 D 0 ec -0 Ju 0 ne 0 D 1 ec Ju 01 ne 0 D 2 ec Ju 02 ne 0 D 3 ec -0 Ju 3 ne 0 D 4 ec Ju 04 ne 0 D 5 ec -0 5 Ju
4 95
D
-9
Ju
ne
3 94
ec
ne
Ju
D
-9
ec D
Ju
ne
93
0
BANGLADESH
Bangladesh Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
138.1 51,914 375.9
Short-term: B
Coface analysis
Medium-term: High risk
RISK ASSESSMENT The annual growth rate has stayed between 5 per cent and 6 per cent for the past ten years, whatever the prevailing political situation or weather conditions. With textiles representing 75 per cent of exports, the economy has held up well since the end of the multifibre arrangement. Bangladesh boasts a low-wage and dynamic workforce that has allowed it to remain competitive in the clothing sector. Higher oil costs have caused financing needs to increase while foreign currency reserves have not enough to cover two months of imports. That
situation could cause the taka to depreciate further and increase the country’s already heavy dependence on bilateral and multilateral aid. However, the political instability associated with pervasive corruption could deter foreign aid and cause near-term liquidity shortages. Continued tensions between the leading government coalition party, the Bangladesh Nationalist Party (BNP), and the main opposition formation (the Awami League) could worsen in the run-up to legislative elections in 2006.
3
MAIN ECONOMIC INDICATORS US$ millions
2001/02 2002/03
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
4.4 2.8 -4.7 5,929 7,697 -1,768 0.5 35.9 7.4
5.3 4.4 -3.4 6,492 8,707 -2,215 0.1 36.3 5.9
5.5 5.8 -3.2 7,521 9,840 -2,319 0.3 36.0 8.5
5.4 7.4 -4.2 8,127 11,610 -3,483 -1.3 34.7 8.7
5.5 7.0 -4.2 8,283 12,628 -4,345 -2.2 36.9 8.3
5.5 6.0 -4.1 8,689 13,365 -4,676 -2.1 37.3 8.0
2.5
2.2
2.3
2.1
1.9
1.6
2003/04
2004/05 2005/06(f ) 2006/07(f )
219 f = forecast
ASIA
Cambodia Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
13.4 4,228 315
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT Economic activity sagged in 2005. The farm sector, representing over 30 per cent of GDP, suffered from the repercussions of drought and low productivity. Meanwhile, textiles (80 per cent of export earnings) have apparently been holding up well after dismantlement of the quotas, with clothing benefiting from low labour costs and strong demand from the United States, the country’s main customer. Better harvest should make it possible to maintain economic activity at respectable levels. However, the limited diversification of the industrial fabric has weakened the economy’s performance and made it very vulnerable to external shocks, like pandemics and droughts. The country’s poor infrastructure has notably limited the development of tourism. The public sector deficit has been substantial, with external accounts showing large imbalances.
Extensive poverty has also been a vulnerability factor. GDP per capita has represented only 6 per cent of the Asian average, with 35 per cent of inhabitants living below the poverty line and people very dependent on subsistence farming. The country’s financial situation has thus been very dependent on international aid. Politically, Prime Minister Hun Sen, in power for 20 years, has asserted his authority in the face of very weakened opposition. The coalition formed in July 2004 should thus be able to hold on until the next elections, scheduled for 2008. Despite that apparent stability, the government’s shortcomings have been troubling. There is widespread corruption. The legal system’s opacity has undermined the country’s attractiveness. The slow pace of structural reforms, intended to improve the legal framework for business and banking, has deterred foreign investment.
MAIN ECONOMIC INDICATORS US$ millions
220
Economic growth (%) Inflation (%) Public sector balance (%) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2005(f ) 2006(f )
2001
2002
2003
2004
5.5 -0.6 -5.4 1,571 2,094 -523 -9.2 63 2.9
5.2 3.2 -6.6 1,755 2,318 -563 -8.8 63 2.7
7.1 1.2 -6.6 2,027 2,560 -533 -10.4 65 2.8
7.7 3.8 -5.1 2,479 3,228 -750 -10.0 62 2.3
5.0 5.6 -5.5 2,672 3,714 -1,042 -11.4 45 1.7
5.0 4.0 -5.5 2,916 4,094 -1,178 -10.7 45 1.5
2.7
3.0
3.0
2.8
2.5
2.4 f = forecast
CHINA
China Population (million inhabitants) GDP (US$ million)
1,288.4 1,417,000
Short-term: A3
Coface analysis
Medium-term: Low risk
STRENGTHS ● The economic opening process has continued, particularly in the banking sector. ● External accounts have remained in surplus thanks to a dynamic export specialization. ● The influx of FDI has remained substantial. ● Foreign debt has been low with foreign currency reserves continuing to grow steadily. ● The savings and investment rates have been high. ● The workforce is relatively well trained with wages still relatively low.
RISK ASSESSMENT With investment still driving the economy, the country has sustained its unabashed dynamism and the expected slowdown has thus not materialized. Household consumption, traditionally less explosive, has continued to increase. Foreign trade, meanwhile, has also been making a positive contribution with exports increasing sharply, spurred by price competitiveness. The risk of overheating seems to be easing with investment slowing in the most sensitive sectors (steel, property). However, difficult investmentallocation choices and a consumption rate whose GDP contribution is still too limited will constitute the main threats to a relatively unbalanced growth dynamic. Despite the robust economic conditions, company margins have continued to shrink, due notably to intense competition in the domestic market and rising raw material costs. Increasingly,
WEAKNESSES Social tensions linked to deterioration of rural living conditions have been increasing. ● Some sectors are exposed to significant overcapacity risk (steel, property). ● The extent of non-performing loans, mainly to state-owned companies, continues to undermine the banking sector. ● Environmental problems could jeopardize the conditions for sustainable development. ● Relations with Taiwan are still a problem. ●
moreover, companies have to self-finance their investments amid a bank credit slowdown. In that context of strained financial performance, the slightest shock could cause an upsurge of payment incidents. Meanwhile, the ‘minimalist’ yuan revaluation (up 2.1 per cent against the US dollar) end-July 2005 has in no way affected China’s dynamism. Despite the announcement of a more flexible foreign exchange regime, the yuan has, in practice, remained pegged to the dollar. With a current account surplus and growing foreign currency reserves, the country’s external financial position has remained very robust. Finally, despite the progress made and an increasingly open system, the banking sector has remained risky with banks still not giving enough consideration to a borrower’s financial situation. New non-performing loans might undermine portfolios in the future.
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ASIA ADVICE FROM COFACE CHINA ■ ■
Management difficulties, disputes and fraud have been responsible for one-third of payment incidents with Chinese companies. Financial difficulties explain the other two-thirds of payment incidents: ● Many companies are of recent creation and thus relatively weak financially. ● Export-oriented companies are vulnerable to international economic downturns. ● The margins of companies focusing on the domestic market have been squeezed by stiff competition: ➜ from other Chinese companies in the electronics and high technology sectors ➜ from foreign companies in the car industry, retail and mobile telephony.
MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ billions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
7.5 -0.3 -2.6 266.1 232.1 34.0 17.4 1.5 14.3 7.5
8.3 -0.4 -2.9 325.7 281.5 44.2 35.4 2.7 13.3 7.1
9.5 3.2 -2.4 438.3 393.6 44.7 45.9 3.1 13.3 4.8
9.5 2.4 -1.4 593.4 534.4 59.0 73.0 4.3 13.7 3.3
9.5 2.3 -1.9 757.0 640.0 117.0 134.2 7.0 13.1 2.7
9.0 2.0 -2.0 931.0 789.0 142.0 160.0 7.1 12.5 2.4
8.6
9.9
10.4
11.8
13.4
14.6
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Means of entry Since WTO accession in late 2001, China has been committed to opening up its market. In the period from 2001 to 2005, the average customs tariff has gradually been lowered from 14 per cent to 9.9 per cent. However, restrictive and often discriminatory health and technical standards are applied to certain imported products (foodstuffs, cosmetics etc). A safety certification system (CCC) complicates import procedures for vehicles, electrical appliances and electronic goods. In performance of its WTO obligations, China opened up the import–export sector to all Chinese law companies
in 2004, including foreign-held ones, and has lifted all remaining restrictions on distribution.
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Attitude towards foreign investors The pace with which the Chinese market has opened up to FDI since the early and mid-1980s has been skilfully managed by the government. New sectors have been brought into this process since WTO accession. While FDI is prohibited in basic postal services, air traffic control, publishing and media, sectors such as telecommunications, construction, town gas and water supply, tourism and finance have been opened up. Every FDI scheme is subject to government approval. The tier of government at which approval is required –
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CHINA municipal, provincial or central – is determined by an investment’s size. The preferred entity for FDI projects is the foreign investment company, which is eligible for tax incentives due to be abolished under the tax reforms announced for 2007 over an as yet undetermined transition period. There has been a flurry of acquisitions (asset purchases, buy-ins) of Chinese enterprises, especially state-owned ones. It should be noted that land is the property of the state and may be acquired only on leasehold (50 years for an industrial plant). In principle, foreign investment companies are required to hire local labour, but may employ foreigners on an exceptional basis. The statutory working week is 40 hours. Paid leave
varies from 5 to 15 business days per year. China does not yet have a unified social welfare system. Foreign exchange regulations The yuan is freely convertible only for ordinary business transactions. Exchange controls were relaxed in July 2005 and the currency revalued by 2 per cent against the US dollar. Although the yuan is no longer officially pegged to the dollar, its exchange rate has so far remained very stable because of the government’s close supervision of the currency market. In mid-November the rate was RMB8.08 to the dollar. In any event, the Chinese currency is expected to edge upwards only very gradually in coming years.
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ASIA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 30 ■ Public consumption 10 ■ Investment 33
Exports: 34% of GDP
Imports: 32% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
80000 70000 60000 50000 40000 30000 20000 10000 0
100000 80000 60000 40000 20000 0 USA Hong Kong Japan
South Germany Korea
Japan
Taiwan
South Korea
USA
Germany
IMPORTS by products ■ Fuels 7% ■ Ores and metals 6% ■ Chemical products 12% ■ Other manufactured goods 21% ■ Capital goods and transport equipment 47% ■ Miscellaneous 8%
EXPORTS by products ■ Office machines and data-processing equipment 15%
■ Telecommunications equipment 12% ■ Clothing 10% ■ Electrical machinery 10% ■ Textiles 6% ■ Miscellaneous 47%
STANDARD OF LIVING / PURCHASING POWER
224
Indicators
China
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
4,980 1,100 0.755 33.1 39 23.6 209 27.6
Regional average DC average 4,610 1,070 0.700 30 39 26 161 26
4,300 1,280 0.697 33 43 31 112 28.4
HONG KONG
Hong Kong Population (million inhabitants) GDP (US$ million)
6.8 156,679
Short-term: A1
Coface analysis
Medium-term: Low risk
STRENGTHS ● Increasing economic integration with continental China – a delocalization site, goods and services market – has benefited the Hong Kong economy. ● Hong Kong boasts an advanced market economy as evidenced by a high level of governance and a solid and powerful financial system. ● Government authorities have pursued strategy, allying development of tourism and high technology with infrastructure enhancement. ● The ‘one country, two systems’ approach should continue considering the complementarity of the two economies. RISK ASSESSMENT Economic growth has remained robust. Focused on growth markets (mainly continental China and the United States), exports have continued to drive the economy. Very dynamic consumption has benefited from the boom of tourism from continental China. In that context, the payment experience registered by Coface has been satisfactory as evidenced by the limited number of payment incidents. While the legal system is very efficient, financial information is not always available on unlisted companies. The Hong Kong economy has demonstrated excellent financial health as attested by its record current account surpluses. However, it is subject to competition from continental China, which has maintained a substantial advantage over the autonomous territory on price competitiveness while developing its infrastructure. The Port of Hong Kong is thus less dynamic today than the Port
WEAKNESSES Continental China could compete with Hong Kong in the services sector by leveraging its comparative advantage on costs. ● Fiscal revenues are still too dependent on volatile property sector performance. ● Maintenance of the Hong Kong dollar’s US dollar peg has been an element of vulnerability since it leaves little room for manoeuvre on monetary policy. ● The territory’s possible democratization will affect relations with Beijing authorities. ●
of Shanghai with large companies now engaged in a delocalization process. Hong Kong has nonetheless maintained advantages linked to its transparent and efficient legal framework, its highly efficient banking system, and its stock exchange – ranked second in Asia – where Chinese companies have preferred to raise almost all their capital. Moreover, the government has been pursuing a policy of strengthening infrastructure (bridges, a port terminal, convention hall, amusement parks and so on), which should permit the territory to keep its place as Asia’s leading trade transit centre. Donald Tsang’s nomination in 2005 to head the executive branch could contribute to easing political tensions. He enjoys some popularity while retaining the central Chinese government’s assent. Although Beijing authorities will control developments on reform policy, it will be in their interests to maintain the status quo.
3
225
ASIA MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ billions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
0.5 -1.6 -5.0 190.9 199.3 -8.3 9.8 5.9 28.9 2.4
2.3 -3.0 -4.9 200.3 205.4 -5.1 12.4 7.6 29.1 3.1
3.1 -1.9 -3.3 224.7 230.4 -5.7 16.5 10.4 37.8 2.6
8.2 0.2 -0.4 260.3 269.6 -9.3 16.4 9.9 41.2 2.1
7.0 1.5 -0.4 284.5 291.4 -6.9 22.8 13.0 40.8 2.3
5.0 1.5 -0.7 307.2 318.8 -11.6 19.3 10.3 40.5 2.4
5.0
5.0
4.8
4.3
3.9
3.7
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Means of entry Hong Kong’s reputation is built on the effectiveness and transparency of its free trade legislation and regulations. It is unquestionably the most open market in Asia and one of the most open in the world, even in the field of government procurement. Hong Kong’s return to China on 1 July 1997 and its new status as a Special Administrative Region – which has allowed the former colony to keep its economic and legal system – have not affected its openness to international trade. Hong Kong has also remained a free port. There are no customs duties and indirect taxes are levied on only a small number of products such as cigarettes, wines and spirits, fuel and cars. Nontariff barriers are extremely rare. A few foodstuffs require a health certificate. For most imports, the only requirement is an import declaration. In some cases, it is possible to make a monthly declaration, rather than one for each shipment. Hong Kong’s standards are in line with, or similar to, international standards. It is the second largest financial centre after Tokyo and boasts a highly internationalized banking sector. Payments are usually made by ordinary letter of credit. Trade is properly regulated and, consequently, all means of payment are used and accepted. Strong
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226
economic growth (8.1 per cent in 2004; 6.5 per cent in the first half of 2005) has led to a marked improvement in the financial position of SMEs, with bad loans at an all-time low. Attitude towards foreign investors The territory’s free trade principles, inherited from the British, are upheld by the government of the Administrative Region without any maladministration by China of the territory’s legal, financial and economic affairs. In keeping with its free market traditions, Hong Kong does not place any restrictions on the activities of foreign investors. There are no prior notification or approval formalities, but there are no government foreign investment incentives or subsidies either. On the ground, local monopolies have succeeded in driving out foreign competitors. In the absence of competition law, the authorities only intervene when distortions damage consumer interests. The legal system is streamlined and company incorporation formalities rapid. Tax laws too are streamlined and tax rates fairly low. The marginal rate of income tax is 16 per cent (since 1 April 2004) and corporation tax is 17.5 per cent (since 1 April 2003). On the other hand, the rules for awarding permanent work permits have been considerably tightened. The property market has picked up sharply and wages have steadied or risen
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HONG KONG slightly. Hong Kong continues to impose high startup costs on potential investors. Foreign exchange regulations There are no exchange controls and the Hong Kong dollar is fully convertible. It is pegged to the US
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dollar at between HK$7.75 and HK$7.85 to the US dollar. This rate is guaranteed by the currency board system, which automatically links Hong Kong’s foreign exchange reserves to the monetary base.
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Hong-Kong
250
3
200
150
100
50
ec -9 4 ne 95 D ec Ju 95 ne 9 D 6 ec -9 Ju 6 ne 9 D 7 ec Ju 97 ne 9 D 8 ec -9 Ju 8 ne 9 D 9 ec Ju 99 ne 0 D 0 ec -0 Ju 0 ne 0 D 1 ec -0 Ju 1 ne 0 D 2 ec -0 Ju 2 ne 0 D 3 ec -0 Ju 3 ne 0 D 4 ec -0 Ju 4 ne 0 D 5 ec -0 5 Ju
3 94 ne
Ju
D
-9
ec D
Ju
ne
93
0
227
ASIA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 22 ■ Public consumption 4 ■ Investment 9
Imports: 161% of GDP
Exports: 170% of GDP MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
100000
120000
80000
100000 80000
60000
60000 40000
40000
20000
20000
0
0 China
USA
Japan
UK
Germany
China
Japan
Taiwan
USA
Singapore
IMPORTS by products ■ Chemical products 6% ■ Other manufactured goods 37% ■ Capital goods and transport equipment 48% ■ Miscellaneous 9%
EXPORTS by products ■ Chemical products 5% ■ Other manufactured goods 43% ■ Capital goods and transport equipment 46% ■ Miscellaneous 6%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
228
Hong Kong 28,680 25,860 0.916 34.9 100 15.8 559 422
Regional average DC average 4,610 1,070 0.700 30 39 26 161 26
4,300 1,280 0.697 33 43 31 112 28.4
INDIA
India Population (million inhabitants) GDP (US$ million)
1,064.4 600,637
Short-term: A3
Coface analysis
Medium-term: Quite low risk
STRENGTHS ● Very substantial market potential with a rapidly developing middle class. ● Definite competitive advantages in many sectors like computers, outsourcing, steel, pharmaceuticals and textiles. ● Dynamic local companies with an international scope. ● Manageable foreign debt and very ample foreign currency reserves. ● Progressive and continuous economic liberalization since 1991 and a start on consolidation of public sector finances and the banking sector.
RISK ASSESSMENT Growth has been accelerating thanks to a good monsoon in 2005 and buoyant domestic demand. Increasing oil prices have apparently not been enough to derail that dynamic. More restrictive monetary policy has been offsetting inflationary pressures attributable to the rising hydrocarbon prices. That policy could, however, affect economic activity in 2006–2007. Growth has nonetheless been resting on solid foundations thanks to the competitive advantages enjoyed by services (notably in computers and outsourcing), dynamic companies with international scope, and the robust growth of domestic demand spurred by a rapidly developing
WEAKNESSES The troubling situation of public sector finances, with public debt unsustainable in the long term. ● An inadequate level of investment attributable to the eviction effect of government borrowing, poor financial intermediation, and deficiencies in infrastructure and the business legal environment. ● Very unevenly distributed growth that could provoke severe social discontent. ● Despite continuing progress, the Kashmir question is still an element of uncertainty in India’s historically conflictual relations with Pakistan. ●
3
middle class. The country’s external financial situation has been comfortable despite the emergence of a current account deficit due to the higher oil costs. In this buoyant context, company solvency has improved with the Coface payment incident index near the world average. However, financial information and the legal protection for creditors have remained inadequate. The country’s fiscal situation has remained its main weakness. Structural reforms will be essential if public sector debt is to remain sustainable and the business environment to improve. Despite the prime minister’s commitment, the government coalition’s heterogeneity has impeded progress on that score.
229
ASIA MAIN ECONOMIC INDICATORS US$ billions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2005/06(f ) 2006/07(f )
2001/02
2002/03
2003/04
2004/05
5.8 1.7 -9.7 44.7 50.7 -5.9 3.4 0.7 23.7 14.7
4.0 6.0 -9.7 53.8 58.0 -4.2 6.3 1.2 23.2 13.6
8.5 4.8 -9.7 64.7 72.2 -7.4 10.6 1.8 21.2 13.7
6.9 5.3 -8.1 80.8 107.1 -26.2 -6.4 -0.9 20.1 8.5
8.0 5.5 -7.8 98.0 132.4 -34.4 -10.0 -1.3 18.7 8.5
7.0 5.3 -7.2 121.6 158.3 -36.8 -14.0 -1.6 18.1 5.4
8.0
9.8
12.2
10.0
8.8
7.8 f = forecast
CONDITIONS OF ACCESS TO THE MARKET Means of entry Customs duties in India remain very high for both agricultural and industrial products. The average rate of duty on industrial products is around 18 per cent (4 per cent for the EU) and peaks of 40 per cent or more are not rare. Farm products are liable to even higher rates of duty (58.4 per cent) and there are swinging duties on products such as wine (140–254 per cent) and spirits (209–525 per cent). On the other hand, some products considered essential to the country’s economic development benefit from reduced rates. Machinery and intermediate goods for the textile industry, IT, some uncut gems, drinking water purification equipment and raw materials are taxed at only 5 per cent. At the WTO Doha Round of trade talks, it was agreed that India could continue to reduce customs duties slowly, provided it undertook to lower and rationalize its tariffs in the next few years. Complex non-tariff barriers not only remain in place but have multiplied since the complete abolition of quantitative restrictions on 1 April 2001. Each shipment of imported foodstuffs is, in principle, subject to systematic inspection. Moreover, prepackaged goods must bear the maximum retail price (including local taxes and transport costs) on their label prior to shipment. Finally, for certain goods,
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230
certification rules of the Bureau of Indian Standards are applied in a manner that places importers at a disadvantage (eg requirement to open a subsidiary or a liaison office and to pay ad hoc duties). Attitude towards foreign investors In contrast to the policy of economic self-sufficiency pursued by the government since independence, from 1991 India has been actively involved in opening up its economy to foreign investment, mainly via the adoption of a ‘negative list’ of sectors, which makes automatic approval of FDI the norm. Nevertheless, a number of obstacles remain. These include restrictions on the manufacture of 675 goods, which remain the preserve of local small industry; ceilings on foreign shareholdings in a variety of sectors; and closure of the retail sector to foreign investors. Moreover, a foreign company already based in India via a joint venture may not open a subsidiary in the same sector with another operator without the written consent of its Indian partner (a slight improvement on the earlier situation in which no business venture was possible without such consent). Corporation tax for foreign law companies is 41.82 per cent, compared with 36.59 per cent for Indian companies. Indirect taxation is complex and lacks transparency. Nevertheless, the reform programme continues apace under the present government as it did under the previous one with
■
INDIA PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995)
the focus primarily on higher ceilings for foreign investment in the few remaining sectors concerned (ie telecommunications, where the ceiling for foreign investment has been raised from 49 to 74 per cent), the creation of a foreign investment commission, greater transparency in foreign investment application approval procedures, reform of intellectual property legislation and convertibility of the rupee for ordinary business transactions.
400
WORLD India
350 300 250 200 150 100 50
D ec -0 5
04 D ec -0 4 Ju ne 04
D ec -0 3
Ju ne
02 D ec -0 2 Ju ne 03
D ec -0 1
Ju ne
00 D ec -0 0 Ju ne 01
D ec -9 9
Ju ne
98 D ec -9 8 Ju ne 99
Ju ne
Ju ne
97 D ec -9 7
0
OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 56 ■ Public consumption 11 ■ Investment 21
3 Imports: 16% of GDP
Exports: 9% of GDP MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
15000
6000
12000
5000 4000
9000
3000 6000
2000
3000
1000
0
0 USA
China
UK
Hong Germany Kong
USA
Belgium
UK
China Singapore
IMPORTS by products ■ All food items 5% ■ Fuels 32% ■ Chemical products 9% ■ Other manufactured goods 20% ■ Capital goods and transport equipment 19% ■ Miscellaneous 15%
EXPORTS by products ■ All food items 12% ■ Fuels 5% ■ Chemical products 11% ■ Other manufactured goods 55% ■ Capital goods and transport equipment 8% ■ Miscellaneous 8%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
India 2,880 540 0.602 28.5 28 32.4 46 7.2
Regional average DC average 2,640 510 0.700 30 28 34 39 7
4,300 1,280 0.697 33 43 31 112 28.4
231
ASIA
Indonesia Population (million inhabitants) GDP (US$ million)
214.7 208,312
Short-term: B
Coface analysis
Medium-term: Moderately high risk
STRENGTHS ● The country has emerged from the overindebtedness characteristic of the 1990s. ● Indonesia boasts vast natural resources (agriculture, energy, minerals). ● External accounts have remained in surplus. ● The success of the first presidential election by universal suffrage, in July/September 2004, consolidated the democratic framework.
232
RISK ASSESSMENT The economic recovery has continued, spurred by booming investment. The growth regime has remained vulnerable due to the oil sector deterioration and low level of foreign investment. Despite an uncertain business climate, structural reforms have been progressing with President Yudhoyono providing the impetus. The country’s economic recovery has definitely spurred company financial consolidation. A paucity of balance sheet information, frequent difficulties with debt collection and many deficiencies in debtor–creditor law have nonetheless limited the improvement observed. President Yudhoyono has already made some solid progress in combating
WEAKNESSES Exports have suffered from a lack of competitiveness attributable in turn to a lack of investment. ● The oil sector’s weakness has made the country dependent on oil imports and vulnerable to price increases. ● Although declining, public and foreign debt has been sensitive to the effects of the rupiah depreciation. ● Corruption has been impeding progress on structural reforms. ● Separatist movements have continued to undermine the cohesion of the world’s largest Muslim country, despite the gradual progress made. ●
corruption, a nonetheless widespread phenomenon that has undermined the business environment. The country’s financial situation has improved. The current account is in surplus and debt ratios have been gradually declining. The fiscal deficit has remained at sustainable levels, although widening due to increased petrol-price subsidies. Rising oil prices nonetheless affected operator confidence in the rupiah during summer 2005. However, with the country’s good fundamentals, the authorities were able to contain the crisis. By increasing domestic petrol prices, they succeeded in stabilizing the currency. Public sector debt, sensitive to interest rate variations, and the downward-trend of foreign currency reserves will nonetheless bear watching.
INDONESIA MAIN ECONOMIC INDICATORS US$ billions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2005(e) 2006(f )
2001
2002
2003
2004
3.8 12.6 -2.4 57.4 34.7 22.7 6.9 4.2 81.2 35.0
4.3 10.0 -0.9 59.2 35.7 23.5 7.8 3.9 66.2 34.8
4.5 5.1 -1.8 64.1 39.5 24.6 8.1 3.4 56.8 30.8
5.1 6.0 -1.2 72.2 50.6 21.5 2.6 1.0 51.3 27.9
4.8 7.8 -1.3 87.7 63.2 24.6 5.4 1.9 44.9 20.9
5.2 7.0 -1.0 94.0 70.6 23.4 3.9 1.2 38.9 20.0
5.5
6.0
6.6
5.4
4.0
4.5
3
e = estimate, f = forecast
Political risk has remained significant. President Yudhoyono nonetheless enjoys solid legitimacy after his triumph in the 2004 elections. Confrontations linked to separatism have been easing thanks to new
peace accords with the Aceh rebels. However, a new wave of attacks in 2005 underlined the difficulties in combating Islamist networks.
CONDITIONS OF ACCESS TO THE MARKET
performs its role actively, albeit with limited powers. The government is keen to boost declining foreign investment after years of crisis. It regards FDI as vital for technology transfer and job creation. Indonesia has signed binding investment protection and guarantee agreements with 56 countries, including France. The country’s economic situation does not allow it to grant extremely attractive tax incentives, except for companies operating in a limited number of priority free zones such as Batam Island facing Singapore. There is temporary tax relief for raw materials and primary machinery purchased by foreign manufacturing companies. Foreign investors may repatriate profits upon payment of local tax. Despite the initiatives announced by successive governments to simplify start-ups in Indonesia, the investment approval procedure adopted by BKPM remains long-winded and tedious. Projects in the banking, financial services and insurance sectors are overseen by the Ministry of Finance, whereas those in mining and oil and gas are the responsibility of the Ministry of Energy. The negative list – which bars foreign investors from a
Means of entry Indonesia pursues a liberal trade policy and since the Marrakech agreement has gradually dismantled customs duties. Of tariff items, 72 per cent are now liable to 0–5 per cent duty. There are tariff peaks for imported cars, iron and steel, certain chemicals and wines and spirits. As well as cutting customs duties, Indonesia is gradually lifting non-tariff barriers on all items except priority products such as rice and sugar. However, a number of products, especially consumer goods, require a licence or certificate to be released on the market. Moves to liberalize trade in line with WTO commitments have been backed by measures to open trade further with the country’s ASEAN partners. The objective of AFTA is to cut duties on manufactured goods to between 0 and 5 per cent.
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Attitude towards foreign investors The Indonesian government is extremely open to foreign investment. BKPM, the government investment promotion and coordination agency,
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233
ASIA limited number of sectors or activities and regulates access to sectors deemed sensitive by the
government – is under review and a new investment law is due to be passed shortly.
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Indonesia
250
200
150
100
50
234
ec -9 5 ne 9 D 6 ec Ju 96 ne 9 D 7 ec Ju 97 ne 9 D 8 ec -9 Ju 8 ne 9 D 9 ec Ju 99 ne 0 D 0 ec -0 Ju 0 ne 0 D 1 ec Ju 01 ne 0 D 2 ec Ju 02 ne 0 D 3 ec -0 Ju 3 ne 0 D 4 ec Ju 04 ne 0 D 5 ec -0 5 Ju
4 95
D
-9
Ju
ne
3 94
ec
ne
Ju
D
-9
ec D
Ju
ne
93
0
INDONESIA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 55 ■ Public consumption 7 ■ Investment 13
Exports: 31% of GDP
Imports: 26% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
15000
5000
12000
4000
9000
3000
6000
2000
3000
1000
0
3
0 Japan
USA
Singapore South Korea
China
Japan
Singapore China
USA
Australia
IMPORTS by products ■ All food items 11% ■ Agricultural raw material 5% ■ Fuels 24% ■ Chemical products 16% ■ Other manufactured goods 14% ■ Capital goods and transport equipment 26% ■ Miscellaneous 3%
EXPORTS by products ■ All food items 11% ■ Agricultural raw material 5% ■ Fuels 26% ■ Ores and metals 6% ■ Chemical products 6% ■ Other manufactured goods 30% ■ Capital goods and transport equipment 16% ■ Miscellaneous 1%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
Indonesia 3,210 810 0.697 28.5 44 29.7 39 11.9
Regional average DC average 4,610 1,070 0.700 30 39 26 161 26
4,300 1,280 0.697 33 43 31 112 28.4
235
ASIA
Japan Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
Coface analysis
127.6 4,666,100 36,568
Short-term: A1
STRENGTHS ● Japan has benefited from a very dynamic regional environment. ● The restructuring already undertaken by banks and companies, notably with the reduction of non-performing loans, will be conducive to a resumption of economic growth. ● The country has devoted substantial resources to education and research, particularly to automation and robotization. ● The current account surplus reflects the competitiveness of export sectors like the car industry and electronics. ● The high level of household savings constitutes a spending reserve.
236
RISK ASSESSMENT Japan maintained moderate economic growth in 2005. However, although fuelled mainly by exports, the growth rested increasingly on company investment and, to a lesser extent, on household spending. Companies, bolstered by the reduction of overcapacity and a return to profitability, made large investments in technology intended to maintain their competitiveness. Thanks to the reappearance of wage bonuses and increased employment in large companies, households increased their spending slightly, and finally stopped reducing their spending on housing.
WEAKNESSES The aging of the population will remain a major challenge and require reduction of public sector debt and deficits. ● The social safety net has proven to be too limited, with family and professional solidarity waning amid increasingly precarious employment and exacerbated social and regional disparities. ● Besides foreign trade’s small contribution to total production, FDI has remained limited and immigration virtually non-existent. ● The Liberal Democratic Party has been dominating the political scene for decades, fostering clientelism and collusion between the government, civil service and companies. ● Rigidities have persisted in many sectors, hampering a judicious allocation of resources. ●
The growth should persist in 2006 despite a slight slowdown. Exports will continue growing at a measured pace, buoyed by the yen depreciation against the dollar and euro. Shipments of electronic equipment to regional countries should recover while vehicle sales in Russia and the Middle East will continue to trend up. Household consumption will register moderate growth again amid possible tax increases. Conversely, after three years of strong growth, private investment could sag with public sector investment continuing to trend down. Restructuring programmes, the economic recovery, massive liquidity injections by the central
JAPAN MAIN ECONOMIC INDICATORS %
2001
2002
2003
2004
Economic growth Consumption (var.) Investment (var.) Inflation Unemployment rate Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)
0.4 1.1 1.1 -0.7 5.0 0.1 -6.1 141.5 -6.1 0.7 2.2
-0.3 0.5 -7.2 -0.9 5.4 0.1 -7.9 147.3 7.3 1.3 2.8
1.4 0.2 6.3 -0.3 5.3 0.0 -8.0 157.3 9.1 3.8 3.1
2.6 1.6 5.8 0.0 4.7 0.0 -7.1 156.0 14.4 8.9 3.7
2005(e) 2006(f ) 2.3 1.9 7.6 -0.1 4.3 0.0 -6.6 160.0 6.4 7.8 3.3
2.1 1.7 5.9 0.3 4.0 0.1 -5.7 163.0 7.0 8.5 3.4
e = estimate, f = forecast
bank and support from government agencies allowed many companies, particularly exporters, to improve their financial situation. The upturn has been lagging for SMEs amid the defection of largecompany customers no longer hesitating to delocalize subcontracting work and the caution exercised by banks in granting loans. The Coface payment incident index has remained below the world average with bankruptcies declining for the third consecutive
3
year (down 28 per cent in 2005). The situation has been particularly good in the production and trading of intermediate products (chemicals, ceramics, glass, cement, metals) and the car industry; somewhat satisfactory in consumer electronics, electrical equipment and construction equipment; and difficult but improving in construction, the retail trade and the hotel-food service industry. In 2006, company solvency should remain good overall.
MAIN ECONOMIC SECTORS Car industry Although the domestic production of Japanese carmakers has been stable, production by their foreign subsidiaries has been growing strongly. That growth is attributable to the upsurge of car registrations in emerging regions, notably Asia, and market share gains in Europe and the United States. In 2006, considering the stabilization of sales expected in mature markets, the Japanese car industry’s dependence on emerging Asian markets should increase.
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dynamic demand for flat products. However, an increase in production capacity, which led to overproduction, has squeezed prices somewhat. In long products, the dynamism of exports to China offset the sluggishness of Japanese public works. The expected growth of domestic markets along with the persistent dynamism of foreign demand will contribute to sustaining production, prices and profits in 2006. The sector’s trend in China will, nonetheless, be of overriding importance. Construction As in the six preceding years, 2005 will have been a year of declining business (down 2.2 per cent), mainly due to the sharp fall of public investment (down 11 per cent). Conversely, companies have increased their investments in industrial construction with private
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Steel With output of 110 million tonnes, 2005 will be the sixth consecutive year of robust production. The Japanese car, shipbuilding, electrical engineering and mechanical engineering industries generated
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237
ASIA housing demand registering slight growth spurred by low interest rates and tax breaks granted to new property owners. With the continued decline of public sector construction, overall business activity will continue to decline in 2006, but only slightly.
to restore their financial equilibrium after years of restructuring. The electronic component and computer peripherals market has also been trending up, thanks to the digitization of many applications. Mass distribution After seven sluggish years, consumption resumed modest growth in 2005. That relative improvement has not benefited everyone, with supermarket and megastore sales declining again. With the government’s proposal to eliminate tax deductions and increase retirement contributions, consumption growth will remain moderate in 2006. However, progress on restructuring programmes, particularly the closing of unprofitable stores, should allow companies to consolidate their financial situations.
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Household appliances and consumer electronics Home appliance manufacturing underwent a structural decline associated with its delocalization to other regional countries. A similar trend also affected home electronics for products like televisions, digital cameras and CD players. Meanwhile, local production of high value-added appliances, like plasma or liquid crystal screens and DVD players, has soared, allowing Japanese groups
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PAYMENT AND COLLECTION PRACTICES Payment Japan has ratified the international conventions of June 1930 on bills of exchange and promissory notes, and of March 1931 on cheques. As a result, the validity of these instruments in Japan is subject to the same rules as in Europe. The bill of exchange and the widely used promissory note (yakusoku tegata), when unpaid, allow creditors to initiate debt recovery proceedings via a fast-track procedure, subject to certain conditions. The fast-track procedure is available for unpaid cheques as well, although the use of cheques is far less common. Clearing houses (tegata kokanjo) play an important role in the collective processing of the money supply arising from these instruments. The penalties for payment default act as a powerful deterrent. A debtor who, twice in six months, fails to honour a bill of exchange, a promissory note or a cheque liable to be settled in Japan, is barred for a period of two years from undertaking businessrelated banking transactions (current account, loans) with financial establishments attached to the clearing house. In other words, the debtor is reduced to a de facto state of insolvency. These two measures normally result in the calling in of any bank loans granted to the debtor. Over the past few decades, bank transfers have become increasingly prominent in all fields of
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238
economic trade, thanks to the widespread use of electronic transfer systems by banks in Japan. Debt collection In principle, to avoid certain disreputable practices employed in the past by specialized companies, only lawyers (bengoshi) may undertake debt collection. However, the law of 16 October 1998, which came into force on 1 February 1999, established the profession of ‘servicer’ to foster debt securitization and facilitate collection of nonperforming loans (NPL debts) held by financial institutions. Servicers are debt collection companies licensed by the Ministry of Justice to provide collections services but only for certain types of debt: bank loans, loans by designated institutions, loans contracted under leasing arrangements, credit card repayments and so on). Out-of-court settlement is always preferable and involves obtaining a signature from the debtor on a notarized deed that includes a clause acknowledging compulsory enforcement, which, in the event of continued default, is directly enforceable without requiring a prior court judgment. The standard practice is for the creditor to send the debtor a registered letter with acknowledgement of receipt (Naïyo Shomeï), the content of which must be written in Japanese characters and certified
■
JAPAN by the post office. The effect of this letter is to set back the statute of limitation by six months (which is five years for commercial debts). If the debtor still fails to respond, the creditor must start legal action during that period to retain the benefit of interruption of the limitation period. Summary proceedings (Shiharaï Meireï), comparable to an injunction to pay, apply to undisputed claims and allow creditors to obtain a court order within about six months. Court fees, payable by the plaintiff in duty stamps, vary according to the size of the claim. In the event of a dispute, these proceedings are converted into ordinary proceedings. Ordinary proceedings are brought before the summary court (kan-i saibansho) for claims under JPY1,400,000 and before the district court (chiho saibansho) for claims above this amount. Those proceedings, consisting of written and oral submissions, can take from one to three years and generate significant legal costs. Court fees, payable in duty stamps, depend on the size of the claim.
With the 1 January 1998 revision of the civil procedure code undertaken to reduce the duration of legal procedures, the new amendment adopted 1 April 2004 is notably intended to speed up the submission of evidence to both the adverse party and judge during the preliminary examination phase. The importance attached to conciliation represents the chief characteristic of the Japanese legal system. Under a conciliation procedure (chotei) – conducted under court supervision – a panel of mediators, usually comprising a judge and two assessors, attempts to resolve civil and commercial disputes amicably. While avoiding lengthy and costly proceedings, any transaction obtained through such conciliation becomes enforceable once approved by the court. Similarly, disputes can be resolved via arbitration (chusai), an approach well appreciated locally and not involving excessive formalism.
3
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Japan
250
200
150
100
50
94
-9 4 ne 9 D 5 ec Ju 95 ne 9 D 6 ec -9 Ju 6 ne 9 D 7 ec Ju 97 ne 9 D 8 ec -9 Ju 8 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 0 D 1 ec -0 Ju 1 ne 0 D 2 ec Ju 02 ne 0 D 3 ec -0 Ju 3 ne 0 D 4 ec Ju 04 ne 0 D 5 ec -0 5
ec D
Ju ne
Ju
93 e
ec D
Ju n
-9 3
0
239
ASIA
Laos Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
6.0 2,122 354
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT Economic growth has been strong thanks to the mining and construction sectors. Demand from Laos’ two main trading partners, Thailand and Vietnam, has been buoying wood, textile and electricity exports. Large investment projects in the hydroelectric and mining sectors should benefit the economy of a country with a still very deficient infrastructure. The growth is nonetheless still vulnerable with agriculture not very productive and dependent on weather conditions. A sector of crucial importance to a very poor economy, farming, in conjunction with forestry still generates 50 per cent of GDP and 80 per cent of jobs. Structural reforms have been lagging with public sector restructuring impeded by the close ties between the business world and Communist Party. Furthermore, the deficient legal system has limited the expected private sector development.
240
Financially, the current account deficit has been very large and public sector debt has only been declining gradually. Debt ratios have not appeared very sustainable with foreign debt – its concessional character notwithstanding – over four times greater than total exports. That legacy from a policy of developing public sector investment has made the country very dependent on multilateral institutions. In the political arena, the Communist Party should continue to dominate political life by exercising tight control over society. The attacks perpetrated in the capital at regular intervals – signs of very real opposition to the government – should not significantly change the political situation. Meanwhile, the Communist Party has been pursuing a policy of opening the economy and fostering the country’s emergence on the international scene. A member of ASEAN, Laos has been a candidate for WTO membership since end–2004.
LAOS MAIN ECONOMIC INDICATORS 2005(f ) 2006(f )
US$ millions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign currency reserves (in months of imports)
5.7 7.8 -4.5 350 567 -217 -6.9 155.1 17.3
5.9 10.6 -4.1 371 583 -212 -6.3 161.1 14.9
5.9 15.5 -5.8 401 618 -217 -5.0 114.3 16.7
5.0 11.9 -3.9 437 752 -315 -8.9 98.5 19.2
6.5 7.8 -4.1 563 764 -201 -8.0 94.8 16.1
6.5 7.8 -3.9 663 864 -201 -6.7 95.4 14.6
2.6
3.8
3.9
3.2
2.8
2.5 f = forecast
3
241
ASIA
Malaysia Population (million inhabitants) GDP (US$ million)
24.8 103,737
Short-term: A2
Coface analysis
Medium-term: Low risk
STRENGTHS ● The economic fabric is very diversified (hydrocarbon oil, palm oil, electronics). ● Public sector infrastructure investments have been substantial. ● Efforts on training and technological development have boosted the economy’s competitiveness. ● Progress has been made in consolidating the financial system and public sector.
RISK ASSESSMENT Despite a slowdown, economic growth has remained solid, underpinned by a diversified economy. The electronics sector has continued to drive the economy while the more traditional palm oil, hydrocarbon oil and gas sectors have benefited from the upward trend of world prices. Private investment should moreover pick up the slack for public investment, a development fostered by improvement in the business climate and restructuring of the public sector. Payment experience has remained good and delinquent debt collection satisfactory. However, it can sometimes still be difficult to obtain financial information on companies. Meanwhile, fiscal deficit reduction has been going forward with the external financial situation
242
WEAKNESSES The high degree of export specialization in electrical and electronic equipment has made the country overly dependent on the world situation. ● Malaysia must accentuate the move upmarket of its products and services. ● Although declining, public sector domestic debt has remained at high levels. ● An excessive amount of outstanding loans continues to undermine the banking sector. ●
benefiting from record current account surpluses. Although debt ratios have been improving, private debt – largely short-term – has been increasing very rapidly. With the respectable level of foreign exchange reserves and the ringgit’s successful and very formal transition to a floating exchange rate regime, liquidity crisis risk has been contained. As for the banking sector, despite progress on consolidation, the high level of outstanding loans – notably in the property sector – bears watching. Politically, the risks are limited. The postMahatir transition has succeeded, ensuring real stability. Continued progress on governance issues, including combating corruption, will be necessary for the country to rejoin the leading Asian economies.
MALAYSIA MAIN ECONOMIC INDICATORS 2005(f ) 2006(f )
US$ billions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
0.3 1.4 -5.5 88.0 69.6 18.4 7.3 8.3 51.9 6.5
4.1 1.8 -5.6 93.4 75.2 18.1 7.2 7.6 51.6 7.8
5.3 1.1 -5.3 105.0 79.3 25.7 13.4 12.9 47.9 7.7
7.1 1.5 -4.3 126.6 99.1 27.5 14.7 12.9 54.6 6.1
4.6 2.3 -3.2 146.3 118.1 28.2 15.3 12.6 58.1 5.2
4.5 2.2 -2.9 165.5 139.6 25.9 11.9 9.1 58.5 4.8
3.8
4.0
4.9
6.0
6.9
6.8
3
f = forecast
CONDITIONS OF ACCESS TO THE MARKET Means of entry A WTO member and signatory to the ASEAN free trade agreement (AFTA), Malaysia pursues a free trade policy. The average rate of customs duty for all goods is below 8 per cent and over 99 per cent of tariff lines bear 0–5 per cent duty. Under AFTA rules, duties on imports from the five other founding members of ASEAN (Brunei, Philippines, Singapore, Indonesia, Thailand) are to be cut below 0.5 per cent for 99 per cent of tariff lines. Tariff peaks remain for cars, steel and alcoholic beverages. The Malaysian government regulates the import and export of certain goods (17 per cent of tariff lines) through automatic and non-automatic licensing. In practice, this rule is not such a hindrance, except in the automotive sector which is subject to high customs duties, excise duties, quotas and pre-import compulsory licensing for the purpose of protecting local manufacturers.
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offshore financial site at Labuan in the east of the country and 14 tax- and duty-free zones. On the other hand, the government’s policy of encouraging greater involvement of Bumiputras (mainly all-Muslim ethnic Malays who make up 60 per cent of the population) in the country’s economic development continues to hamper foreign investment in the non-industrial services sector. The government’s sector guidelines remain vague and each application is examined on a caseby-case basis by the competent local authority. Foreign exchange regulations On 21 July 2005, Malaysia abandoned its fixed exchange rate against the US dollar, in force since September 1998, in favour of controlled flotation. Currency transactions are subject to central bank approval, but this procedure does not pose a problem. Local currency borrowings to purchase foreign exchange, which contributed to the
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PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Malaysia 250
200
150
100
50
ne Ju
D
93 ec -9 3 ne 9 D 4 ec -9 Ju 4 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 97 D ec Ju 97 ne 9 D 8 ec -9 Ju 8 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 0 D 1 ec Ju 01 ne 02 D ec Ju 02 ne 0 D 3 ec -0 Ju 3 ne 04 D ec Ju 04 ne 0 D 5 ec -0 5
0
Ju
Attitude towards foreign investors The government has introduced tax incentives to encourage the establishment of foreign businesses (Pioneer Status, Investment Tax Allowance, Regional Distribution Centre Status, Operational Headquarters Status). Foreigners are allowed to wholly own manufacturing, high-tech or industryrelated service companies. Malaysia also has an
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243
ASIA speculative activity seen in 1997, are tightly controlled. That is why the currency’s internationalization (assets held in Malaysian
ringgits outside Malaysia) is not on the agenda. This does not seem to hinder business life in the country, which goes on regardless.
OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 23 ■ Public consumption 7 ■ Investment 11
Exports: 114% of GDP
Imports: 93% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
25000
15000
20000
12000
15000
9000
10000
6000
5000
3000
0
0 USA
Singapore Japan
China
Hong Kong
Japan
USA
Singapore China
South Korea
IMPORTS by products ■ All food items 5% ■ Fuels 6% ■ Chemical products 7% ■ Other manufactured goods 14% ■ Capital goods and transport equipment 61% ■ Miscellaneous 7%
EXPORTS by products ■ All food items 9% ■ Fuels 10% ■ Chemical products 5% ■ Other manufactured goods 15% ■ Capital goods and transport equipment 57% ■ Miscellaneous 5%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
244
Malaysia 8,970 3880 0.796 38.4 59 33.3 182 166.9
Regional average DC average 4,610 1,070 0.700 30 39 26 161 26
4,300 1,280 0.697 33 43 31 112 28.4
MONGOLIA
Mongolia Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
2.5 1,274 509.6
Short-term: C
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT Despite a noticeable slowdown, economic growth has remained dynamic after the exceptional year registered in 2004. The country has benefited from a high degree of specialization in minerals, with copper and gold respectively representing 33 per cent and 28 per cent of total exports. The economy also benefits from the dynamism of neighbouring China (half of exports) currently eager for raw materials. Services, notably tourism, have been posting good performance. Nonetheless, the economic situation has remained tied to raw material price trends. Due to the mining sector’s equipment needs, the country has been running large current account deficits. Its external financial position has thus remained shaky. The public sector debt burden (88 per cent of GDP in 2005), although gradually declining, is still too large with Mongolia remaining
dependent on international financial aid. Fiscal policy has nonetheless become increasingly strict. With the concessional nature of the debt, its service has been modest. The country’s financial outlook has been brighter since concluding an agreement with Russia, end-2003, on debt contracted pre1991. Government authorities have undertaken to reform state-owned companies. According to the IMF, however, governance of public institutions needs improvement. Nambaryn Enkhbaya, the Popular Revolutionary Party candidate, won the May 2005 presidential election. He would like to increase presidential powers, which could cause internal tensions. In the international arena, thanks to its mineral wealth and strategic position, the country has maintained good relations with its neighbours and its main financial backers, including the United States.
3
245
ASIA MAIN ECONOMIC INDICATORS 2005(f ) 2006(f )
US$ millions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
1.0 6.3 -5.4 523 693 -170 -14.7 88.7 5.1
4.0 1.7 -5.9 524 753 -229 -14.4 87.5 4.5
5.6 4.7 -4.2 627 827 -200 -11.6 97.1 34.0
10.6 10.6 -2.2 872 1,021 -149 -4.5 89.7 7.5
6.0 10.0 -1.8 914 1,120 -206 -7.1 82.5 3.7
6.0 5.5 -3.0 883 1,150 -267 -9.6 84.4 3.5
3.0
3.4
2.1
2.0
2.4
2.3 f = forecast
246
NEPAL
Nepal Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
24.7 5,851 239.6
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT The political landscape was again in turmoil in 2005. A conflict between the traditional parties and King Gyanendra compounded the civil war opposing, since 1996, the Maoists that control about two-thirds of the country and the central government. Early February 2005, the king decreed a state of emergency that ended 15 years of parliamentary democracy. In November 2005, the Maoists concluded an agreement with the seven main parties to put an end to the absolute monarchy. The political situation has nonetheless remained deadlocked. Although relatively isolated, the king has thus far remained in power and still enjoys the support of the army. Moreover, there is a fundamental divergence of objectives between the
guerrillas bent on establishing a communist republic and the other parties seeking a return to a parliamentary monarchy. That triangular conflict has weakened the economy of one of the world’s poorest countries. The situation in the Kathmandu region, not controlled by the rebels, has been particularly shaky. In conjunction with the multifibre arrangement’s dismantlement, frequent strikes and roadblocks have contributed to the decline of clothing sales to the United States, which have represented 80 per cent of Nepal’s market in that sector. Since January 2005, 60 per cent of textile companies have thus failed. Tourism, another major resource, has been in sharp decline. Expatriate remittances and farming alone have been fuelling economic activity.
3
MAIN ECONOMIC INDICATORS US$ millions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2003/04
2004/05(e) 2005/06(f )
2000/01
2001/02
2002/03
4.8 3.4 -6.2 945 1,710 -765 2.9 49.9 4.7
-0.6 3.5 -5.8 754 1,448 -694 1.9 53.2 5.3
3.1 6.1 -3.7 653 1,556 -903 0.3 51.5 5.6
3.5 2.0 -3.9 737 1,796 -1,059 0.1 46.5 6.0
2.0 6.4 -5.3 787 1,830 -1,042 0.2 43.7 6.3
2.0 6.0 -4.9 823 1,984 -1,161 -0.1 42.0 6.3
6.1
7.4
7.8
8.3
8.2
7.6
247 e = estimate, f = forecast
ASIA
New Zealand Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
Coface analysis
4.1 98,900 24,354
Short-term: A1
RISK ASSESSMENT In 2005, the central bank again raised its key rates drastically to cool down an overheated economy; that objective was finally reached in the second half of the year. Although company investment declined rapidly, household consumption held on longer, supported notably by the sharp income growth resulting from the low unemployment rate, appreciation of property assets and the very expansive fiscal policy made possible by the substantial public sector surplus position. Robust domestic demand again resulted in a further upsurge of imports with exports suffering from an overvalued New Zealand dollar. Growth will be more balanced in 2006. Household spending should increase moderately amid continued high interest rates and a property
market downturn. In that context, imports will continue to decline while exports, spurred by the New Zealand dollar’s decline, should begin to recover despite downward international price trends for milk products, meat, wool and apples. Conversely, productive investment by companies should continue to trend down due to a decline in profitability associated with rising production costs. The sudden economic slowdown, caused by the tighter monetary policy and decline of profitability, was probably responsible for the increase in company bankruptcies (up 14 per cent for the first eight months of 2005). Although that put an end to the downward trend registered in recent years, the number of bankruptcies has nonetheless remained low, which attests to the
MAIN ECONOMIC INDICATORS % Economic growth Consumption (var.) Investment (var.) Inflation Unemployment rate Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)
2001
2002
2003
2004
2.7 2.5 -4.1 2.6 5.3 5.7 2.1 35.7 2.9 1.2 -2.8
4.5 4.4 3.3 2.7 5.2 5.7 3.9 34.0 6.3 10.5 -4.2
3.7 5.4 13.4 1.8 4.6 5.4 5.3 32.0 2.1 8.4 -4.2
4.4 6.3 15.9 2.4 3.7 5.8 5.5 29.0 5.9 16.6 -6.5
2005(e) 2006(f ) 2.6 4.5 2.1 3.2 3.4 6.8 5.3 24.0 1.0 8.0 -8.0
2.3 2.4 4.2 3.0 3.9 7.2 4.6 21.0 5.8 6.0 -7.0
248 e = estimate, f = forecast
NEW ZEALAND financial solidity of New Zealand companies and their capacity to cope with growth rate changes.
The increase in payment defaults should cease in 2006 with the stabilization of economic growth.
PAYMENT AND COLLECTION PRACTICES As a former British colony in the 19th century, New Zealand’s legal code and precepts are largely inspired by British common law and the British court system. New Zealand became a dominion within the Commonwealth on 26 September 1907. Payment Bills of exchange or promissory notes are not frequently used for commercial transactions in New Zealand and mainly serve to authenticate the existence of claims. Conversely, cheques are relatively widely used for domestic transactions. Wire transfers or SWIFT bank transfers are the most commonly used payment method for domestic and international transactions. Most of New Zealand’s banks are connected to the SWIFT network, which offers a rapid, cost-efficient means of effecting payments.
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Debt collection The collection process starts with the serving of final notice by recorded delivery, a ‘seven-day letter’ whereby the creditor notifies the debtor of his payment obligations. Without payment by the debtor company of an uncontested payable claim exceeding NZ$1,000 (or after obtaining a ruling), the creditor may summon the debtor to settle his debt within 15 days or face a winding-up petition with his company considered insolvent (statutory demand under section 289 of the Companies Act 1993). Under ordinary proceedings, once a statement of claim (summons) has been filed and where debtors have no grounds on which to dispute claims, creditors may solicit a fast-track procedure enabling them to obtain an executory order by issuing the debtor with an application for summary judgment. This petition must be accompanied by an affidavit (a sworn statement by the plaintiff attesting
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to the claim’s existence) along with supporting documents authenticating the unpaid claim. For more complex or disputed claims, creditors must instigate standard civil proceedings, an arduous, often lengthy process lasting up to two years. Proceedings are heard by the District Courts, or by the High Courts for claims exceeding NZ$200,000. Appeals against the decisions handed down by the Court of Appeal, located in Wellington, are lodged as of 1 January 2004 and, after it has granted leave on the legal validity of the case to be submitted to it, with the recently established Supreme Court of New Zealand, also located in Wellington. Such recourse was previously sought via the Privy Council in London. In addition, the High Court may hold summary proceedings for commercial disputes concerning, for example, the fields of insurance, banking, finance, intellectual property, goods transport, and which are enumerated in its ‘commercial list’. The High Court is also competent to hear insolvency proceedings and maritime disputes. During the preliminary phase, proceedings are written insofar as the Court examines the case documents authenticating the parties’ respective claims. During the subsequent ‘discovery phase’, the parties’ lawyers may request their adversaries to submit any proof or witness testimony that is relevant to the case and duly examine the case documents thus submitted. Before handing down its judgement, the Court examines the case and holds an adversarial hearing of the witnesses who may be cross-examined by the parties’ lawyers. Arbitration and mediation proceedings may also be used to resolve disputes and obtain out-ofcourt settlements, often at a lower cost than through the ordinary adversarial procedure.
3
249
ASIA PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD New Zealand
250
200
150
100
50
5
4
D
ec
-0
04 ne Ju
D
ec
-0
04
3 -0
ne
ec D
Ju
2
03
-0
ne
ec D
Ju
1
02 ne Ju
D
ec
-0
01
0 -0 ec
ne
D
Ju
9
00 ne Ju
D
ec
-9
99
-9 8 ec
ne Ju
D
ne
D
250
Ju
ec
-9
98
7
0
PAKISTAN
Pakistan Population (million inhabitants) GDP (US$ million)
148.4 82,324
Short-term: C
Coface analysis
Medium-term: High risk
STRENGTHS ● Pakistan’s exceptional geopolitical position has allowed it to obtain substantial international aid since 11 September 2001. ● The country enjoys a competitive advantage in textiles and has benefited from dismantlement of the multifibre arrangement. ● Private remittances from expatriates working in the Persian Gulf have been a major source of foreign currency. ● Tensions with India over Kashmir have eased.
WEAKNESSES The economy is very dependent on low valueadded sectors (textiles, cotton). ● The low level of human development indicators has limited the possibilities of moving to higher value-added production. ● Deficiencies in public services have spurred discontent, reinforcing the appeal of certain radical Islamic organizations. ● Some of the population also strongly contest the Westernization option and the alliance with the United States. ●
RISK ASSESSMENT For the past three years, Pakistan has posted high economic growth, achieved thanks to international aid received since 11 September 2001 and debt restructuring granted by the Paris Club, as well as internal implementation of structural reforms (banking sector, trade and taxes). The rapid development of textile exports, where the country enjoys a definite advantage, has also contributed to that dynamic.
Debt ratios have nonetheless remained too high. Of greater concern, financing needs have widened markedly with the increased cost of oil. Although currently covered by FDI and long-term concessional loans, those needs may prove more difficult to meet in the future. Meanwhile, significant political risk, very insufficient socialindicator levels (notably education and health) and poor governance have been the country’s main weaknesses and major deterrents to FDI.
CONDITIONS OF ACCESS TO THE MARKET
notable exceptions such as cars, which are subject to a separate system of taxation (50–75 per cent depending on the number of cylinders). The maximum rate of duty in the service sector is 10 per cent. As a general rule, Pakistan follows the World Customs Organization’s harmonized international nomenclature and recommendations. Nevertheless,
Means of entry Market access is gradually being freed up. Customs duties in the industrial sector are trending downwards. The maximum rate of custom duty is 25 per cent ad valorem (CIF value), with some
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3
251
ASIA MAIN ECONOMIC INDICATORS US$ billions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2001/02 2002/03
2003/04
2004/05 2005/06(f ) 2006/07(f )
2.8 2.9 -4.0 9.8 10.4 -0.6 3.9 5.5 47.1 24.7
5.8 6.5 -2.9 11.9 12.0 -0.1 3.6 4.4 44.2 17.9
6.4 8.4 -2.8 13.4 16.7 -3.3 -0.7 -0.7 37.8 17.4
8.4 7.1 -3.1 15.4 21.2 -5.8 -3.4 -3.2 37.7 9.8
6.6 6.8 -3.0 17.9 24.3 -6.4 -4.2 -3.6 36.4 10.3
6.0 5.9 0.0 20.2 27.0 -6.8 -4.9 -3.9 35.1 9.3
3.5
6.4
5.1
4.1
3.9
3.9 f = forecast
it is advisable to remain vigilant about Pakistani customs’ interpretation of the definitions of imported products. The practice of applying tariffs that place local importers at a disadvantage often results in disputes. Excise duty ranging from 3 per cent to 90 per cent and 15 per cent maximum general sales tax apply to all goods and transactions on top of customs duties. In fact, excise duty is being phased out in favour of an extension of sales tax. The Pakistani rupee is freely convertible and the central bank permits capital transfers without any major restrictions. Although the exchange rate is floating, the central bank maintains a relatively stable rupee against the US dollar (the rate fluctuates between 59/60 rupees to the US dollar) and intervenes, where necessary, to support its currency’s exchange rate. Attitude towards foreign investors Foreign investment is governed by special legislation. The Pakistan government is extremely positive towards foreign investment which, though small (8.5 per cent of GDP in 2004–2005), has shot up 60 per cent over the same one-year period. It hopes to attract investors by introducing ever more investment-friendly legislation. Foreign investors do not face restrictions on company incorporation (100 per cent ownership is permitted in the industrial and agricultural sectors)
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252
or, in the case of foreign companies, on property ownership. Nor are they required to tie up with a local partner, except for projects in the service sector. In services, they may not hold more than 60 per cent of a company after five years. The minimum foreign investment in services is US$0.3 million. Once established, resident companies face the same taxation as local ones. The 2005–2006 budget has reduced corporation tax across a whole range of sectors. Banks have seen their tax rates lowered to 38 per cent from 41 per cent, private sector enterprises are taxed at 37 per cent compared with 39 per cent, and the tax rate for public sector undertakings remains unchanged at 35 per cent. Pakistan has signed bilateral investment protection treaties with 46 countries, including France. These treaties aim to offer investors safeguards against nationalization or unlawful expropriation and allow them to repatriate capital and related income freely. Pakistan has recently ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The previous mechanism for settling investment disputes made Pakistan less attractive to international investors. The country is also a signatory to the convention setting up the Multilateral Investment Guarantee Agency (MIGA – World Bank group).
PAKISTAN OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 61 ■ Public consumption 10 ■ Investment 13
Exports: 20% of GDP
Imports: 20% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
3000
1500
2500
1200
2000
3
900
1500
600
1000
300
500 0
0 USA
UAE
UK
Germany Hong Kong
UAE
Saudi Arabia
China
Japan
Kuwait
IMPORTS by products ■ All food items 11% ■ Agricultural raw material 5% ■ Fuels 24% ■ Chemical products 18% ■ Other manufactured goods 13% ■ Capital goods and transport equipment 25% ■ Miscellaneous 5%
EXPORTS by products ■ Textiles and yarns 26% ■ Ready-made garments 20% ■ Carpets 19% ■ Leather 8% ■ Miscellaneous 27%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
Pakistan 2,040 520 0.527 28.3 34 40.1 27 4.2
Regional average DC average 2,640 510 0.700 30 28 34 39 7
4,300 1,280 0.697 33 43 31 112 28.4
253
ASIA
Papua New Guinea Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
5.5 3,182 578.5
Short-term: B
Coface analysis
Medium-term: High risk
RISK ASSESSMENT Economic growth has been in an acceleration phase linked to an investment rebound in raw material sectors. With gold, oil, copper and palm oil generating nearly 80 per cent of the country’s exports, they have remained the main economic engines. Gold production, in particular, seems likely to surge under the effect of large investment projects and firm prices. Economic activity will benefit from the pipeline linking the country to Australia, with its construction now apparently under way after many delays. Consumption could benefit from the decline of interest rates. The country thus seems to be finally in the process of realizing the substantial potential associated with raw materials. However, its economic structure still seems essentially based on income from raw material exports. Its performance has, moreover, been very dependent on large investment projects vulnerable to an unstable domestic situation.
254
The improvement in economic policy effectiveness has been perceptible with inflation and the public sector deficit now under control. The country has, moreover, been benefiting from unprecedented political stability. The Prime Minister, Sir Michael Somare, should prove to be the first chief executive to complete his entire term and thus remain in office until 2007. Moreover, the establishment of an independent government on Bougainville Island will end years of murderous conflict. Nepotism and insecurity have nonetheless continued to mark the business environment. The poor ratings on corruption and legislative compliance given by the World Bank reflect the country’s major shortcomings on governance. Its social indicators have also been a source of concern with the poverty level, infant mortality, and life expectancy showing a considerable variance with its Australian neighbour. Although Papua has remained very economically dependent on
PAPUA NEW GUINEA Cambera, its relations with Australia have been MAIN ECONOMIC INDICATORS erratic. US$ millions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2001
2002
2003
2004
2005(e) 2006(f )
2.7 2.0 1.8 1.1 2.0 2.8 10.3 11.7 11.8 3.5 7.3 4.5 -4.1 -5.5 -2.0 -1.7 -1.5 -0.8 1,812.9 1,639.7 2,200.7 2,529.4 2,832.7 2,236.0 932.4 1,077.5 1,187.3 1,459.4 1,650.8 1,784.0 880.5 562.2 1,013.4 1,070.0 1,181.9 452.0 15.2 5.5 9.6 1.9 1.7 0.2 71.7 72.9 56.0 46.5 39.8 33.8 25.7 20.5 13.4 11.6 11.0 11.3 3.6
2.5
3.2
3.7
3.1
2.9
e = estimate, f = forecast
3
255
ASIA
Philippines Population (million inhabitants) GDP (US$ million)
81.5 80,574
Short-term: B
Coface analysis
Medium-term: Moderately high risk
STRENGTHS ● The economy is very specialized in electronics (nearly 70 per cent of sales abroad). ● The country’s competitiveness has been holding up, particularly in special economic regions. ● The workforce’s skills, productivity and adaptability have been assets, particularly for international companies. ● External accounts have benefited from remittances from expatriate workers comprising one of the world’s largest expatriate communities.
RISK ASSESSMENT Economic growth has been in a slowdown phase, due mainly to the high level of oil prices, which has had a substantial impact on a very energyconsuming industry. Household consumption, buoyed by massive private transfers, has continued to underpin the economy. The payment experience registered by Coface has remained good and companies have been relatively transparent. The volatile economic environment has weakened smaller companies with the electronics and textile sectors apt to suffer from Chinese competition. The government’s financial situation has remained shaky with the large public debt vulnerable to market variations. Sovereign risk has nonetheless tended to ease progressively: the public
256
WEAKNESSES Inequalities and demographic growth have undermined economic performance. ● The country is distinctive in Asia for its low level of domestic savings, which makes it dependent on financial markets. ● The banking system has remained in poor shape with the sector lacking reforms and supervision. ● The business climate has suffered from persistent governance problems. ● Insecurity, attributable particularly to the Islamist rebellion in the archipelago’s southern region, has tended to deter foreign investors. ●
sector debt burden has been declining and the government has been pursuing relatively tight fiscal policy. The external financial situation has been very steady with the country continuing to run large current account surpluses. Debt ratios have been coming down and the level of foreign currency reserves has been improving. President Gloria Arroyo has successfully deflected impeachment proceedings. She continues to enjoy the backing of the religious hierarchy and military establishment with the opposition proving unable to mobilize the people. The weakness of her position will nonetheless make it difficult to implement tax and banking reforms. However, only those reforms could prop up investor confidence and ultimately make economic results less volatile.
PHILIPPINES MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ billions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
1.8 4.5 -4.1 31.2 32.0 -0.7 1.3 1.9 80.6 19.7
4.3 2.5 -5.4 34.4 34.0 0.4 4.4 5.8 79.2 17.2
4.6 3.9 -4.8 35.3 40.8 -5.5 1.4 1.8 78.7 17.7
6.0 8.6 -4.0 38.8 44.5 -5.8 2.7 3.3 72.4 14.8
4.6 6.4 -3.4 40.1 46.9 -6.8 3.2 3.3 63.0 14.0
4.4 6.0 -2.2 41.6 49.9 -8.2 3.3 3.1 57.9 14.0
4.0
3.8
3.3
2.9
3.3
3.5
3
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET ■ Market overview As a rule, the market is very open and the problem of limited acces has more to do with non-tariff barriers. It is difficult, even impossible, for foreigners to enter certain sectors (engineering, architecture, advertising) as they are reserved for Filipinos. Imports of some products are subject to stringent regulatory restrictions, including the award of certificates by an inefficient and often corrupt administrative service. Six tariffs currently apply: 0, 3, 5, 10, 15 and 20 per cent. Customs duties remain fairly low despite an increase in 2004. The average Most Favoured Nation (MFN) tariff fell from 9.7 per cent in 1999 to 5.8 per cent in 2003, before rising to 7.4 per cent in 2004. Some exceptional protective tariffs have been retained. For instance, farm products have a higher degree of protection than manufactured products (10.3 per cent against 7 per cent). The problem of high customs duties on some goods is exacerbated by swinging excise duties on, for instance, champagne, cigarettes, sparkling wine and certain makes of car. For payments, the irrevocable and confirmed documentary letter of credit is recommended. While a legal framework has been put into place to strengthen intellectual property protection, the
slowness of administrative procedures and the shortage of resources at the disposal of judges to enforce legal decisions limit its effectiveness. ■ Attitude towards foreign investors A ‘One Stop Action Center’ at the Board of Investments disseminates practical information and facilitates registration formalities. It is advisable to engage a local lawyer. The Security and Exchange Commission (SEC) is a government agency responsible for the registration, regulation and monitoring of all companies and partnerships established in the Philippines. Registration with the SEC takes three to five days, provided the application file is complete. The Foreign Investments Act 1991, amended in 1996 and again in 1998, has liberalized foreign investment over the last ten years. Foreign investors interested in infrastructure development can avail themselves of certain provisions of the Build-Operate-Transfer Act (1990). Another law lets foreign investors lease land to put up a production unit. The Philippines’ constitution also allows foreign businesses to repatriate their investment, together with any profits earned, in the currency of origin, and to raise loans on the local financial market. It provids safeguards against the expropriation or confiscation of an investment. Various types of incentive are granted. The government has introduced tax incentives to
257
ASIA ■ Foreign exchange regulations There are no exchange controls, but all imports are subject to the filing of a foreign exchange application. Local banks may, on the instruction of the central bank, require clients to document their request for foreign currency. The exchange rate is floating.
encourage foreign investment. There are also free tax and customs zones. The Philippines is one of the most open countries in the region, even though some sectors of activity are constitutionally the preserve of local investors (legal and medical services, accounting etc).
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Philippines
250
200
150
100
50
258
5 -0 ec
4
05 D
-0 ec
ne Ju
3
04 D
-0 ec
ne Ju
2
03 D
-0 ec
ne
D
Ju
1
02
-0 ec
ne Ju
0
01 D
-0 ec
ne
D
Ju
9
00
-9 ec
ne Ju
8
99 D
-9
ne Ju
7
98
ec D
-9 ec
ne Ju
6
97 D
-9 ec
ne Ju
5 ec
96 D
Ju
ne
-9
95
ne
D
ec
-9 Ju
D
Ju
ne
94
4
0
PHILIPPINES OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 48 ■ Public consumption 7 ■ Investment 13
Exports: 48% of GDP
Imports: 51% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS
3
Mn USD
8000 7000 6000 5000 4000 3000 2000 1000 0
8000 7000 6000 5000 4000 3000 2000 1000 0 USA
Japan
Hong Netherlands Taiwan Kong
Japan
USA
Singapore South Korea
Taiwan
IMPORTS by products ■ All food items 8% ■ Fuels 9% ■ Chemical products 7% ■ Other manufactured goods 11% ■ Capital goods and transport equipment 38% ■ Miscellaneous 27%
EXPORTS by products ■ All food items 5% ■ Other manufactured goods 14% ■ Capital goods and transport equipment 76%
■ Miscellaneous 4%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
Philippines 4,640 1,080 0.758 36.3 61 36 41 27.7
Regional average DC average 4,610 1,070 0.700 30 39 26 161 26
4,300 12,80 0.697 33 43 31 112 28.4
259
ASIA
Singapore Population (million inhabitants) GDP (US$ million)
4.3 91,342
Short-term: A1
Coface analysis
Medium-term: Very low risk
STRENGTHS ● Singapore has one of the most open economies in the world with exports playing a major role in its performance. ● It is one of Asia’s most advanced countries in quality competitiveness terms. ● The workforce’s education and skill level is very high. ● The country has become a major exporter of capital in Asia, particularly the state-owned holding company, Temasek. ● Singapore boasts great political stability.
260
RISK ASSESSMENT Economic growth is becoming more moderate. Although consumption and exports have continued to post respectable growth, investment has been flat due to rising oil prices and less buoyant demand for electronic products (32 per cent of industrial production). Economic performance has nonetheless remained solid, underpinned by pharmaceuticals and services. Coface has registered satisfactory payment experience despite a lack of financial transparency by smaller companies. The country boasts an efficient legal system and good governance. The very high current account surplus has held up well through electronics-sector cycles. Exports have benefited from the steadiness of demand from its main trading partners, Malaysia, the United States, China and Hong Kong. Profits repatriated from Singapore’s investments abroad have also contributed to the balance of payments surplus. Moreover, balanced public sector accounts, limited
WEAKNESSES The economy has remained overspecialized in the electronics sector. ● Singapore must speed up the diversification in services to maintain its lead over other Asian economies and even catch up with Japan and the United States. ● Reforms are still necessary to foster innovation and education-system modernization. ● The aging of the population could ultimately affect economic performance. ●
foreign debt and comfortable foreign currency reserves have contributed to the country’s very solid financial situation. A still highly effective banking system could suffer from stiff domestic competition and a risky expansion strategy in Asia. In the face of competition in electronics from Asian economies, Singapore has been pursuing diversification strategy that has been consolidating its position. Pharmaceuticals already represent 10 per cent of exports compared with that sector’s tiny contribution in 1995, while the electronics sector’s share declined from 80 per cent to 60 per cent during the same period. The country is also counting on development of petrochemical products, high value-added services and biotechnologies. The political situation has appeared very stable. Even in case of early legislative elections in 2006, Prime Minister Lee Hsien Loong and his People’s Action Party will very likely remain at the head of the city state’s executive branch.
SINGAPORE MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ billions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
-2.0 1.0 1.6 133.7 118.0 15.7 16.7 21.4 2.5
3.2 -0.4 -1.1 137.7 120.2 17.5 17.6 23.4 2.0
1.4 0.5 -1.6 158.4 130.3 28.1 29.1 24.0 1.7
8.4 1.6 -1.1 197.3 166.1 31.2 26.0 22.1 1.3
5.2 0.3 0.4 219.5 188.8 30.7 24.4 214.5 1.4
4.5 0.9 1.2 231.4 202.7 28.7 21.3 21.1 1.5
5.6
5.9
6.4
5.9
5.5
5.2
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview A fervent advocate of multilateral trade at international organizations (WTO) and regional bodies (ASEAN, APEC), Singapore is engaged in a series of ambitious free-trade talks aimed at strengthening its links with the most vibrant markets. A small developed economy with a population of 4 million, the city-state has signed nine free trade agreements: with New Zealand in 2000; with Japan and EFTA in 2002; with the United States and Australia in 2003, with Jordan in 2004, with India and South Korea in 2005, and with Brunei, Chile and New Zealand in the form of the Trans-Pacific agreement also in 2005. Agreements with another ten countries, including Canada, Mexico, Pakistan and the Gulf states are under negotiation.
3
barriers. There are no customs duties except on some alcoholic beverages. Non-tariff barriers are rare.
■
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Singapor
250
200
150
100
50
Ju
ne 9 D 3 ec -9 3 ne 9 D 4 ec Ju 94 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 97 D ec Ju 97 ne 9 D 8 ec Ju 98 ne 99 D ec Ju 99 ne 0 D 0 ec -0 Ju 0 ne 0 D 1 ec Ju 01 ne 0 D 2 ec Ju 02 ne 0 D 3 ec Ju 03 ne 0 D 4 ec Ju 04 ne 05 D ec -0 5
0
Ju
Means of entry Singapore’s openness to the outside world is one of the keys to its economic success. Foreign trade, for instance, accounted for 340 per cent of GDP in 2004. The country is a free port, with storage and warehousing playing a significant economic role. Regardless of the international economic situation, Singapore continues to pursue liberal trade and investment policies, without the slightest inclination towards protectionism. Its trade policy is characterized by the almost total absence of tariff
■
Attitude towards foreign investors Singapore keenly welcomes foreign investment and offers a very open and well-planned economic and political environment. The government uses FDI to develop priority sectors (electronics, chemicals, biotechnology). The aim is to encourage the growth of high value-added activities and turn the island into a regional hub for foreign investors looking to do business in Asia. The Economic and Development Board (EDB) is a key player in the development and promotion of investment in Singapore. However, certain sectors (media, legal and financial services) are only partially open to foreign investment. The government is starting to open them up, but progress is slow. Plans to increase competition throughout the economy were given the green light in the Singapore Competition Act 2004, which came into force on 1 January 2005.
■
261
ASIA aim of the Monetary Authority of Singapore (MAS) is to marginally raise the Singapore dollar’s exchange rate against a basket of currencies of its main trading partners, the main component of which is the US dollar.
Foreign exchange regulations The exchange rate is a key instrument of government monetary policy, the main feature of which is a flexible exchange rate within an adjustable fluctuation band. Since April 2004, the
■
OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 16 ■ Public consumption 5 ■ Investment 5
Exports: 174% of GDP
Imports: 152% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
25000
25000
20000
20000
15000
15000
10000
10000
5000
5000
0
0 Malaysia
USA
Hong Kong
China
Japan
Malaysia
USA
Japan
China
Taiwan
IMPORTS by products ■ Fuels 14% ■ Chemical products 7% ■ Other manufactured goods 15% ■ Capital goods and transport equipment 59% ■ Miscellaneous 6%
EXPORTS by products ■ Fuels 9% ■ Chemical products 12% ■ Other manufactured goods 11% ■ Capital goods and transport equipment 61% ■ Miscellaneous 7%
STANDARD OF LIVING / PURCHASING POWER Indicators
262
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
Singapore 24,180 21,230 0.907 32.8 100 20.7 450 622
Regional average DC average 4,610 1,070 0.700 30 39 26 161 26
4,300 1,280 0.697 33 43 31 112 28.4
SOUTH KOREA
South Korea Population (million inhabitants) GDP (US$ million)
47.9 605,331
Short-term: A2
Coface analysis
Medium-term: Low risk
STRENGTHS ● Major efforts on education and research have been underpinning industry’s move upmarket. ● Exports have focused on dynamic markets with the United States and China representing nearly 40 per cent of sales. ● The country has become a major investor in Asia. ● Structural reforms have been progressing. ● Government authorities have continued to intervene to support the financial system.
RISK ASSESSMENT Although the economic recovery has continued, it has not been as strong as expected. The household over-indebtedness crisis has ended as evidenced by the recovery of private consumption. Constrained by the high oil prices, investment has only been growing moderately. Increasing raw material imports have reduced the current account surplus. However, thanks to market share gains in China and India and increasing quality competitiveness in motor vehicles and electronics, exports have remained an essential economic driver. In that context, the Coface payment incident index has remained below the world average. Export oriented, chaebols have in general improved their financial situations. More dependent on local economic conditions, smaller companies have benefited from the domestic demand recovery.
WEAKNESSES Smaller companies have been carrying too much debt while large companies have been giving priority to financial consolidation, which has constrained investment. ● Although declining, household debt is still high. ● Some technology-sector companies have been suffering from Chinese competition. ● Banking system supervision and company governance still have shortcomings. ● The North Korean regime’s unpredictability has weighed on South Korea’s geopolitical environment. ●
With the recovery continuing, economic policy should become less expansionary. The fiscal deficit – albeit moderate – should be reduced and monetary policy should become more restrictive. The external financial situation has been very robust with low debt ratios and large foreign exchange reserves. Although the financial sector consolidation has been progressing, diversification of lending in favour of consumer credit has generated losses for the banks. Moreover, company governance has been improving thanks to progress on regulations. President Roh has little room for manoeuvre due a lack of parliamentary majority since the April 2005 legislative by-elections. He may encounter difficulties in implementing reforms that he has been promoting. Concerning relations with North Korea, the dialogue strategy via aid and trade, should continue since this is the consensus opinion among the people.
3
263
ASIA MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ billions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
3.8 3.2 -1.7 151.5 138.0 13.5 8.2 1.7 27.1 13.1
7.0 3.7 0.7 163.4 148.6 14.8 5.4 1.0 26.1 8.6
3.1 3.4 0.2 197.3 175.3 22.0 11.9 2.0 26.6 8.5
4.6 3.0 -0.9 257.7 219.6 38.2 27.6 4.1 26.2 5.6
3.7 3.1 -1.6 292.0 256.0 36.0 18.0 2.3 23.8 6.3
5.0 3.0 -1.5 338.0 302.0 36.0 13.0 1.6 23.7 5.6
6.9
7.5
8.3
8.5
7.6
7.0
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET ■
WORLD South Korea
250
200
150
100
50
ne
D
93 ec -9 3 ne 9 D 4 ec -9 Ju 4 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 97 D ec Ju 97 ne 9 D 8 ec Ju 98 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 0 D 1 ec Ju 01 ne 02 D ec Ju 02 ne 0 D 3 ec Ju 03 ne 04 D ec Ju 04 ne 0 D 5 ec -0 5
0
Ju
264
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
Ju
Means of entry South Korea’s import arrangements are fairly open, with the vast majority of imports having been liberalized over recent years, in particular since OECD membership in 1996. The average rate of customs duty is 8 per cent, although tariff peaks remain in place, especially in the agricultural sector. Obstacles to trade placed in the way of foreign companies consist mainly of non-tariff barriers. These usually take the form of technical standards (as for cars) or health norms. Korean food health regulations display, in both spirit and practice, a marked ignorance of new products trying to enter the market due to the traditional character of Korean food. Intellectual property, especially trademarks, receives better protection today if registered beforehand, but infringement is widespread. The legal system may seem satisfactory, but there are shortcomings in the way laws are sometimes enforced. Business relations with a Korean partner are not quite as difficult as they are made out to be. For ordinary business transactions, it is customary for the exporter, at least early on in a relationship, to ask for partial or total payment before shipment. In any case, for small buyers the irrevocable letter of credit is recommended.
Attitude towards foreign investors Since joining the OECD in 1996, South Korea has been particularly proactive in promoting FDI and has opened up almost all sectors to foreign investment. The few restrictions that remain are often also found in the legislation of other OECD countries (utilities, defence, agriculture). FDI inflows increased eightfold to US$15.2 billion between 1995 and 2000. Although FDI seems to have fallen since, President Ron Moo-hyun’s government, which came to power in February 2003, is taking steps to enhance South Korea’s attractiveness to foreign investors and, ultimately, to turn the country into a hub of northeast Asia. The measures include the setting up of special economic areas with expemtion regimes designed to attract foreign investment. As a result, FDI inflows nearly doubled from US$6.5 billion in 2003 to US$12.8 billion in 2004.
■
SOUTH KOREA convertible and freely transferable. However, a couple of restrictions remain: Korean residents must declare capital exports and some transactions are subject to approval. The exchange system will be fully, but gradually, liberalized by 2011.
Foreign exchange regulations The parity of the won is determined by the currency market and since January 2001 – when exchange controls introduced in the wake of the 1997 financial crisis were abolished – the currency has been fully
■
OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 40 ■ Public consumption 10 ■ Investment 21
Exports: 38% of GDP
Imports: 36% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
3
MAIN ORIGINS OF IMPORTS Mn USD
40000 35000 30000 25000 20000 15000 10000 5000 0
40000 35000 30000 25000 20000 15000 10000 5000 0 China
USA
Japan Hong Kong Taiwan
Japan
USA
China
Saudi Arabia
Germany
IMPORTS by products ■ All food items 6% ■ Fuels 21% ■ Ores and metals 5% ■ Chemical products 9% ■ Other manufactured goods 19% ■ Capital goods and transport equipment 35% ■ Miscellaneous 4%
EXPORTS by products ■ Chemical products 8% ■ Other manufactured goods 22% ■ Capital goods and transport equipment 61% ■ Miscellaneous 8%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
South Korea 18,000 12,030 0.901 22.5 84 20.7 538 558
Regional average DC average 4,610 1,070 0.700 30 39 26 161 26
4,300 1,280 0.697 33 43 31 112 28.4
265
ASIA
Sri Lanka Population (million inhabitants) GDP (US$ million)
19.2 18,237
Short-term: B
Coface analysis
Medium-term: Moderately high risk
STRENGTHS ● The country’s human development indicators have been far above the South Asian average. ● The economy boasts industrial and farm sectors that are competitive in the export market. ● Sri Lanka has substantial tourist potential. ● The country has emerged from 20 years of civil war between the Tamil Tigers and Singhalese authorities, which left 60,000 dead. The ensuing truce has, nonetheless, been shaky.
RISK ASSESSMENT Despite its human toll, the late-2004 tsunami ultimately had little effect on economic activity in 2005, which remained dynamic. Tourism recovered faster than expected and especially textiles, representing over half of exports, withstood the elimination of quotas relatively well. The country’s financial situation has nonetheless weakened. Reconstruction has increased an already heavy debt burden. Although rescheduling granted by creditors led to a reduction of debt service in 2005, the situation should be much more difficult in coming years, especially with the country remaining very vulnerable to oil price increases and possessing only limited foreign currency reserves.
266
WEAKNESSES Its dependence on a single manufacturing sector has been a source of vulnerability even if textiles have been holding up relatively well against Chinese and Indian competition. ● The very heavy public-sector debt burden will be unsustainable in the long term. ● Deep ethnic and religious divisions between the Singhalese and Tamils, compounded by significant cleavages within those communities, have kept political risk at high levels. ●
The substantial deterioration of the political climate could moreover deter foreign aid and capital. Meanwhile, there has been a troubling resumption of tensions between the Singhalese and Tamils with a significant likelihood of renewed hostilities. The November 2005 presidential election campaign revealed a climate not very conducive to peace. The nationalist parties allied with the new president, Mahinda Rajapakse, will be likely to impede efforts aimed at opening the economy and oppose any deal with the Tamil Tiger rebels who, themseves, have not been demonstrating a strong desire to compromise.
SRI LANKA MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ billions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
-1.5 14.2 -10.8 4.8 6.0 -1.2 -1.5 60.3 10.0
4.0 9.5 -8.9 4.7 6.1 -1.4 -1.6 62.3 9.8
6.0 6.3 -8.3 5.1 6.7 -1.5 -0.4 64.1 9.7
5.4 7.6 -8.2 5.8 8.0 -2.2 -3.2 62.9 10.9
5.3 11.2 -8.2 6.4 8.4 -2.0 -1.9 56.4 7.4
5.9 6.4 -7.8 7.1 9.1 -2.0 -3.4 55.3 10.5
1.9
2.6
3.2
2.3
2.3
2.2
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Means of entry With the liberalization of 70 per cent of its economy – which also leaves it exposed to international economic developments – Sri Lanka is highly investment-friendly and sees foreign investment as a driver of growth and much-needed modernization of its infrastructure and plants. Its simplified customs tariff structure and trade practices modelled on Britain make this island a fairly liberal and attractive market. Sri Lanka is securely tied to the vast market of the Indian subcontinent, especially since the ratification in 2000 of a free trade agreement with India, which should lead to a Comprehensive Economic Partnership Agreement (CEPA) in the medium term. It simultaneously pursues closer regional integration, ratifying a free trade agreement with Pakistan in May 2005. There is also the prospect of free trade agreements with the United States and Egypt. The new GSP+ scheme, introduced in July 2005, allows Sri Lanka to export almost all its products to the EU free of duty. Numerous investment opportunities exist not only in the agri-foods sector but also in manufacturing (industrial diversification), infrastructure construction
3
(financed with international aid) and the fast-growing service sector (ICT).
■
Attitude towards foreign investors Sri Lanka is open to foreign investment despite restrictions in several sectors. Its liberal regulations, laws and constitution provide adequate investment safeguards. The country maintains a policy of nondiscrimination between foreigners and nationals (despite the reappearance of the 100 per cent tax on the property acquisitions by non-nationals) and, as a founding member of the Multilateral Investment Guarantee Agency (MIGA), provides safeguards against expropriation and non-commercial and political risks. Sri Lanka also has bilateral investment protection agreements with many countries, including France, which cover investors against possible nationalization and provide for full compensation where necessary, free repatriation of profit and capital, and dispute settlement under the aegis of the International Centre for Settlement of Investment Disputes (ICSID). The Board of Investment (BOI) is responsible for promoting and monitoring investment. It offers much-needed assistance with a whole raft of administrative formalities relating to start-up as well as numerous tax incentives.
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267
ASIA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 54 ■ Public consumption 6 ■ Investment 15
Exports: 36% of GDP
Imports: 42% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
2000
1200 1000
1500
800
1000
600 400
500
200
0
0 USA
UK
India
Germany Belgium
India
Hong Singapore Japan Kong
China
IMPORTS by products ■ All food items 14% ■ Fuels 14% ■ Chemical products 9% ■ Other manufactured goods 41% ■ Capital goods and transport equipment 18% ■ Miscellaneous 5%
EXPORTS by products ■ All food items 21% ■ Other manufactured goods 69% ■ Capital goods and transport equipment 5% ■ Miscellaneous 5%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
268
Sri Lanka 3,740 930 0.751 27.8 24 25.1 49 13.2
Regional average DC average 2,640 510 0.700 30 28 34 39 7
4,300 1,280 0.697 33 43 31 112 28.4
TAIWAN
Taiwan Population (million inhabitants) GDP (US$ million)
22.7 281,131
Short-term: A1
Coface analysis
Medium-term: Low risk
STRENGTHS ● Companies tend to be flexible and pursue strategy based on technological innovation. ● The levels of research and development and education have been among the highest in Asia. ● The island has benefited from a high savings rate that has made it possible to finance large public sector debt. ● The government has continued to back research through public spending. ● There is a consensus on consolidating established democratic principles and practices.
RISK ASSESSMENT Economic activity has been suffering from energy spending, exchange rate appreciation and, especially, less buoyant demand for electronic goods (50 per cent of exports) also subject to fierce competition. Consumption, spurred by the dynamism of credit to private individuals, has continued to buoy the economy. The slowdown should be limited. High-technology companies have often delocalized their operations to continental China to capitalize on advantageous labour costs. That process should allow Taiwanese companies to maintain their position as the manufacturers of 70 per cent of laptop computers. The payment experience registered by Coface has remained very good. The margins of hightechnology companies have nonetheless been shrinking under the effect of increasingly stiff competition. With the profits accumulated in past
WEAKNESSES Taiwan has been dependent on the electronicssector business cycle and on energy imports. ● The banking sector has been burdened with over-extended networks with its rationalization slow to take effect. ● Relations with continental China are still the main source of uncertainty. ●
years, the company financial situation has remained solid. Financially, public sector debt – largely domestic – has been growing rapidly under the cumulative effect of public sector deficits, With tax rates not very high, tax reform would appear in order. However, such reform could be a slow process considering the hostility in parliament to the executive branch’s authority. Taiwan’s external financial position has remained very robust, as attested by the record level of foreign exchange reserves and low debt ratios. Although the banking sector has remained too fragmented, its rationalization has been progressing. After President Chen Shui-bian’s close reelection in March 2004, his popularity plunged. The December 2004 legislative and December 2005 municipal elections were marked by the successes of an opposition more conciliatory to continental
3
269
ASIA MAIN ECONOMIC INDICATORS 2005(e) 2006(f )
US$ billions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
-2.2 0.0 -6.7 122.1 102.2 19.9 18.3 6.5 12.3 2.6
3.9 -0.2 -4.3 129.8 105.7 24.1 25.6 9.1 15.1 2.6
3.3 -0.3 -2.8 143.4 118.5 5.4 29.3 10.2 21.2 2.6
5.7 1.6 -2.7 173.2 157.0 16.2 18.6 6.1 24.2 3.0
3.8 2.1 -2.7 186.9 173.8 13.1 15.8 4.8 24.6 3.4
4.5 1.2 -2.7 195.5 183.7 11.8 15.2 4.2 24.0 3.5
11.2
14.4
16.3
14.8
14.2
13.5
e = estimate, f = forecast
China. That situation has sustained risks of domestic discord. Parliament could block reforms initiated by the government and in any case limit more aggressive policy on the island’s sovereignty.
The status quo with the continent should persist due notably to the increasingly important economic ties between the two economies.
CONDITIONS OF ACCESS TO THE MARKET
decline to 15.3 per cent over the next five years. The obstacles identified by French firms arise mainly in tightly regulated sectors (agri-foodstuffs, pharmaceuticals) or concern business practices prevalent in sectors little orientated towards export (construction, environment, utilities). Numerous businesspersons point to the inadequacies of the legal system, especially in matters of public procurement, private–public partnership and intellectual property. It is clear that the island’s diplomatic isolation does not facilitate judicial cooperation and delays the adoption of international standards. The letter of credit, generally valid for 180 days, is the most widely used means of payment in Taiwan. To a lesser degree, open accounts are also used for settlements between companies. Instruments other than the letter of credit should be used with caution because of the difficulties in enforcing court rulings against defaulters. Apart from the WTO, Taiwan is neither a member of major international organizations nor a signatory to international treaties and so applies the principle of bilateral reciprocity, especially in matters of enforcement.
Market overview The Taiwanese market has no major barriers to imports of foreign goods and services. For the last ten years, the Taiwanese government has focused on widening market access and harmonizing its regulations with international standards to pave the way for WTO membership on 1 January 2002 – one of Taiwan’s many assets as far as foreign firms are concerned. Customs duties, already comparitively low in relation to the other countries of the region prior to accession, were further slashed along with tariff barriers. The average nominal tariff rate decreased from 8.25 per cent before accession to 7.2 per cent on 1 January 2002 and 5.5 per cent this year. Tariff reductions concern almost 4,500 imported products and will be spread over a ten-year period from 2002 to 2011. The first cuts were applied from I January 2002. The biggest reduction concerns agricultural products, the average tariff for which was cut from 20 per cent to 16.3 per cent in 2002 and should
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270
TAIWAN Attitude towards foreign investors Foreign companies encounter few administrative obstacles to start-up. Most are engaged in commercial activities and so look to open a sales office or branch. Those involved in a heavier activity such as manufacturing set up subsidiaries in the form of capital companies having their own legal personality and commercial capacity. Taiwan’s company law contains discriminatory provisions against foreign-held subsidiaries, which can be waived by obtaining foreign investment approval.
Foreign exchange regulations In theory, the Taiwanese currency (new Taiwanese dollar or NTD) has a floating exchange rate. In practice, however, the central bank intervenes very actively on the currency market to control the currency’s value, especially against the US dollar and the yen. Investors should note that Taiwan’s foreign exchange regulations are fairly strict, although foreign investment approval procedures have recently been relaxed.
■
■
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995)
3
300
WORLD Taiwan
250
200
150
100
50
5 -0
4 05 D
ec
-0
Ju
ne
3 04
ec D
-0
Ju
ne
2 03 D
ec
-0
Ju
ne
1 02 D
ec
-0
Ju
ne
0 01
ec D
-0
Ju
ne
9 00 D
ec
-9
Ju
ne
8 99 D
ec
-9
Ju
ne
7 98
ec D
-9
Ju
ne
6 97
ec D
-9
Ju
ne
5 96
ec
ne
D
95
-9
ec D
Ju
-9 4 Ju
ne
3 94
ec D
ne
-9
ec
Ju
D
Ju
ne
93
0
271
ASIA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 44 ■ Public consumption 9 ■ Investment 12
Exports: 51% of GDP
Imports: 45% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
40000 35000 30000 25000 20000 15000 10000 5000 0
30000 25000 20000 15000 10000 5000 0 China
USA Hong Kong Japan Singapore
Japan
USA
South Korea
China Singapore
IMPORTS by products ■ Fuels 12% ■ Ores and metals 5% ■ Chemical products 12% ■ Other manufactured goods 19% ■ Capital goods and transport equipment 44% ■ Miscellaneous 8%
EXPORTS by products ■ Chemical products 8% ■ Other manufactured goods 30% ■ Capital goods and transport equipment 56% ■ Miscellaneous 6%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
272
Taiwan n/a n/a n/a n/a n/a 19.9 568 499
Regional average DC average 4,610 1,070 0.700 30 39 26 161 26
4,300 1,280 0.697 33 43 31 112 28.4
THAILAND
Thailand Population (million inhabitants) GDP (US$ million)
62.0 142,953
Short-term: A2
Coface analysis
Medium-term: Quite low risk
STRENGTHS ● The country’s economic diversification ranges from agriculture (notably rice and fish farming) to industry (food, car industry, electronics). ● The ratio of education spending to GDP has been among the highest in Asia. ● The savings rate has been high. ● The process of restoring financial solvency has continued in both the public and private sectors. ● The country is a regional crossroads and boasts a democratic political system.
RISK ASSESSMENT The economy has been in a slowdown. Drought and fears associated with avian flu have had a negative impact on the farm sector, which employs nearly 40 per cent of the population. The electronics sector has been suffering from less buoyant international demand and competition from China. Chinese competition has also been affecting the textile sector. The economy is nonetheless diversified. The private sector is very flexible and tourism has been rebounding since the tsunami tragedy end2004. The current slowdown should thus be limited. The low Coface payment incident index reflects the progress made on company financial consolidation. Shortcomings on governance, including a relatively poor legal system and a lack of company transparency, have continued to mark the business environment.
WEAKNESSES Competitiveness has been declining, especially in textiles but also in electronics. ● The business climate has suffered from the persistent ties between the business and political worlds. ● The economy is not open enough to foreign investment. ● Amid renewed credit expansion, the proportion of non-performing loans held by banks has been too high. ● The insurrection by Muslim rebels in the south has stoked tensions not only domestically but also with neighbouring Malaysia. ●
The financial situation has been giving little cause for concern considering the country’s moderate debt ratios. Fiscal policy has been particularly strict as evidenced by the public sector surpluses posted since 2003. However, the emergence of a current account deficit – linked to disappointing export performance and the cost of oil – has limited the room for manoeuvre available to government authorities in stimulating the economy. The second term in office won by Prime Minister Thaksin Shiwanatra in February 2005 ensures political stability and continuity on economic strategy. Reform efforts – notably privatizations – have been encountering obstacles and have hardly been progressing. The security situation has been more tense in the south with a resurgence of confrontations between the army and Muslim rebels.
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273
ASIA MAIN ECONOMIC INDICATORS 2005(f ) 2006(f )
US$ billions
2001
2002
2003
2004
Economic growth (%) Inflation (%) Fiscal balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2.2 0.7 -2.9 63.1 54.6 8.5 6.2 5.3 58.4 18.8
5.3 1.6 -2.5 66.1 57.0 9.1 7.0 5.5 46.7 16.5
6.9 1.8 0.4 78.1 66.9 11.2 8.0 5.6 37.1 9.2
6.1 2.9 0.1 94.9 84.3 10.6 6.6 4.1 31.4 7.4
4.0 6.8 1.1 109.4 107.4 2.3 -4.4 -2.5 30.1 6.8
5.0 3.5 1.0 126.2 123.2 3.0 -5.5 -2.9 31.4 5.4
5.2
5.8
5.5
5.2
4.2
3.8
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Means of entry In compliance with its WTO commitments, Thailand hass gradually reduced import quotas and replaced them with tariff quotas and customs duties for consumer goods, in particular foodstuffs, toiletries, cosmetics and cars. However, the government has decided to cut duties on many semi-finished and capital goods. Thailand’s active involvement in the construction of AFTA has led it to slash customs duties on goods traded with its ASEAN partners. The country also favours bilateral free trade agreements, such as those signed with Australia and New Zealand or under negotiation with Japan and the United States.
■
Attitude towards foreign investors The government’s legal reform programme continues apace, the purpose of which is to improve the business environment in the country. Although government rhetoric vacillates between protectionism and liberalization, Thailand’s multiple strengths continue to pull investors. The government’s investment promotion agency, the Board of Investment, is responsible for facilitating foreign start-ups (particularly in the NICT,
automotive and fashion sectors) and granting incentives (total or partial exemption from corporation tax and import duties on inputs), the size of which are based on sector of activity and place of establishment. Tax exemptions, however, are due to be abolished in accordance with WTO requirements. Foreign exchange regulations Since the onset of the Asian crisis on 2 July 1997, the baht has been floating against the US dollar. Anxious to maintain the stability of the local currency, the central bank only intervenes on an ad hoc basis to cushion sharp fluctuations and limit offshore transactions of the baht. While Thai legislation does not restrict foreign currency transactions linked to the trade of goods and services, it has recently been tightened to prevent purely speculative movements.
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274
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
250
WORLD Thailande
200
150
100
50
Ju ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec -0 5
0
THAILAND OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 36 ■ Public consumption 7 ■ Investment 16
Exports: 66% of GDP
Imports: 59% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
15000
3
20000
12000
15000
9000 10000 6000 5000
3000 0
0 USA
Japan Singapore
China
Hong Kong
Japan
USA
China
Malaysia Singapore
IMPORTS by products ■ All food items 5% ■ Fuels 12% ■ Chemical products 11% ■ Other manufactured goods 21% ■ Capital goods and transport equipment 43% ■ Miscellaneous 8%
EXPORTS by products ■ All food items 14% ■ Agricultural raw material 5% ■ Chemical products 6% ■ Other manufactured goods 25% ■ Capital goods and transport equipment 44% ■ Miscellaneous 6%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
Thailand 7,450 2,190 0.778 33.8 20 22.9 105 39.8
Regional average DC average 4,610 1,070 0.700 30 39 26 161 26
4,300 1,280 0.697 33 43 31 112 28.4
275
ASIA
Vietnam Population (million inhabitants) GDP (US$ million)
81.3 39,164
Short-term: B
Coface analysis
Medium-term: Moderately high risk
STRENGTHS ● Vietnam benefits from a high-quality, low-wage work force that has attracted foreign investment. ● The government has remained firmly committed to reforming economic structures. ● A development strategy, centred on the opening up of the economy as an instrument of reform, has been gradually bearing fruit. ● As an ASEAN member, Vietnam has become integrated into a dynamic region with the objective of joining the WTO soon. ● Improved relations with the United States have led to rapid development of bilateral trade.
276
RISK ASSESSMENT Buoyed by an investment boom, economic growth has been very dynamic. However, the transition from a rural economy to an industrial economy currently pursued by the country has not been without risk, notably a threat of overheating as evidenced by the excessively rapid credit expansion. The payment experience registered by Coface has been satisfactory thanks to the emerging private sector’s dynamism. Often created recently and thus weak, however, private companies could suffer in an economic downturn. Financially, although the country now runs a current account deficit, direct investment –
WEAKNESSES Traditional production and low-end manufactured products are still predominant in the country’s specialization. ● The administrative and legal environment is still ill-suited to foreign investor needs, legislative improvements notwithstanding. ● The troubling state-owned bank situation will ultimately affect public sector finances. ● With economic growth apparently not well managed, bubbles could develop, particularly as regards bank loans. ● Social and geographic inequalities have been widening, particularly between urban and rural areas. ● In per capita income terms, Vietnam is one of Asia’s poorest countries. ●
attracted by the economic dynamism, low production costs and prospective WTO admission – has been covering its financing needs. With mainly concessional foreign debt, moreover, the country’s debt ratios have been declining. Foreign currency reserves have been relatively limited with the dollar-pegged dong weakened by the widening current account deficit. Fiscal policy has not been very transparent with some expenses, notably investment projects, handled off budget. The banking system restructuring has been progressing too slowly and non-performing loans, already substantial, could increase unless credit is brought under control.
VIETNAM MAIN ECONOMIC INDICATORS US$ billions
2001
2002
2003
2004
2005(e) 2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
6.9 0.5 -5.0 15.0 14.4 0.6 0.5 1.6 37.6 10.6
7.1 4.0 -4.5 16.7 17.6 -0.9 -0.6 -1.6 34.8 8.6
7.3 2.9 -7.2 20.1 22.7 -2.6 -2.1 -5.3 33.7 7.9
7.7 9.7 -4.5 26.0 28.4 -2.4 -1.9 -4.1 34.2 6.2
7.5 7.0 -3.8 31.6 35.0 -3.4 -2.4 -4.8 34.2 5.2
7.4 6.5 -3.8 36.7 40.3 -3.7 -2.6 -4.8 33.0 5.2
2.2
2.0
2.4
2.2
2.2
2.0
3
e = estimate, f = forecast
Although the country has been politically stable, it has suffered from poor governance. The legal system and regulatory environment are still
deficient. Spurred by the combination of centralization and an increasingly open economy, corruption has been very widespread.
CONDITIONS OF ACCESS TO THE MARKET
AFTA is the driving force behind the country’s reduction of tariff barriers. Since July 2003, most ASEAN products are liable to less than 20 per cent customs duty (with the notable exception of agrifoodstuffs and cars). By 1 January 2006, Vietnam will be totally integrated with AFTA and almost all customs duties on products imported from Asean will be nil or 5 per cent. Exports from the EU benefit from the most-favoured nation clause.
Means of entry Vietnam has undoubtedly been striving for several years to liberalize its trade. The first step was membership of AFTA in 1995 as part of the country’s regional commitments to ASEAN. It then committed itself to a broader programme of liberalization upon ratifying a bilateral trade agreement with the United States in December 2001. The ‘early harvest’ agreement concluded with the EU in December 2004 allows EU firms to enjoy the same market access arrangements as their American counterparts. In particular, several tariff lines have undergone a unilateral reduction in import duties. The minimum import pricing system, especially for European wines and spirits, has been abolished. The prospect of WTO accession in the course of 2006, or by early 2007 at the latest, has also helped guide the Vietnamese legislature which, in November 2005, voted through 15 or so important laws designed to integrate the country into international trade (single laws for investment, companies, intellectual property etc). Vietnam’s membership of
■
Attitude towards foreign investors The legal environment is rapidly changing. The country’s basic law sets out highly investmentfriendly principles. The constitution, amended in 1992, encourages private investment and recognizes free enterprise as private ownership of the means of production, with the exception of land and mineral resources. The single investment act passed recently (29 November 2005) lays down the principle of non-discrimination between Vietnamese and foreign investors in both the private and public sectors. However, it does not remove the dual procedure for registering and approving investments or the practice of restricting or closing sectors to foreign investment. It is therefore
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277
ASIA important to watch the enforcement decrees of this act closely. The fact that the Vietnamese government continues to hold an open dialogue with foreign companies and governments leads one to believe that there will be a favourable outcome to this legislation. All the same, its implementation, not just its preparation, remains something of a cause for concern. As for the settlement of disputes, in addition to questions of legal process and jurisdiction, there is no guarantee that court decisions will be properly enforced. National arbitration is limited and there is little or no recourse to international arbitration. Nevertheless, foreign investment should reach a record US$5.5 billion in 2005, compared with US$4 billion in 2004, thereby demonstrating foreign investor confidence in the Vietnamese economy. The encouraging aspect of this investment is that it is
278
evenly divided between project start-ups and extensions. The vast majority of investors are Asian (67 per cent), with France remaining the leading Western investor (US$2.2 million at 1 January 2005). Foreign exchange regulations Foreign-held companies may acquire foreign exchange from commercial banks in connection with their business. There are no admissible cash guarantees, but the law provides for government guarantees in respect of ‘very important’ projects. Foreign-held companies can now open a foreign account. In addition, a major change in currency legislation has lifted the provision under which companies were required to convert a proportion of their foreign currency earnings into local currency. Finally, Vietnam is committed to completely liberalizing its current account balance in June 2006.
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VIETNAM OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 39 ■ Public consumption 7 ■ Investment 21
Exports: 60% of GDP
Imports: 68% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
5000
3500
3
3000
4000
2500 3000
2000
2000
1500 1000
1000
500
0
0 USA
Japan
Australia
China Germany
China
Taiwan
Japan
South Singapore Korea
IMPORTS by products ■ All food items 6% ■ Fuels 11% ■ Chemical products 15% ■ Other manufactured goods 33% ■ Capital goods and transport equipment 29% ■ Miscellaneous 6%
EXPORTS by products ■ All food items 25% ■ Fuels 21% ■ Other manufactured goods 40% ■ Capital goods and transport equipment 8% ■ Miscellaneous 5%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
Vietnam 2,490 480 0.707 29.9 25 30.6 54 9.8
Regional average DC average 4,610 1,070 0.700 30 39 26 161 26
4,300 1,280 0.697 33 43 31 112 28.4
279
The Middle East and North Africa Oil Price to Stay High on Upside Risks 282 The Range of Country @ratings in the Middle East and North Africa
285
Algeria Bahrain Egypt Iran Iraq Israel Jordan Kuwait Lebanon Libya Morocco Oman Palestinian Territories Qatar Saudi Arabia Syria Tunisia United Arab Emirates Yemen
291 295 298 302 305 306 309 313 316 320 323 326 329 330 333 337 340 344 347
4
281
OUTLOOK FOR 2006
Oil Price to Stay High on Upside Risks Experts from Oxford Analytica, Oxford
il prices have fallen from post-hurricane highs this year. If market over-supply materializes, they will continue to fall. However, risks on the upside are more likely to prevail in 2006. Future oil price expectations – shaped by events of 2005 – show divergence, highlighting uncertainty in the oil market.
O
KEY INSIGHTS Unless GDP growth collapses, the market will probably remain tight throughout 2006. ➙ Significant extra capacity is unlikely to emerge outside of Saudi Arabia. ➙ The market is still vulnerable to the threat of losing a major exporter, leading to another price spike. ➙ If any market weakness emerges, OPEC is expected to intervene to protect the price. ➙ Prices are likely to be around US$50 per barrel for 2006 and are unlikely to fall. ➙
There are two ways the oil market may evolve in 2006: ●
282
Weaker market. In the aftermath of Hurricanes Katrina and Rita, oil prices fell by around US$10 per barrel. Since the hurricanes, OECD commercial stocks of crude and products are the highest they have been for five years. Combined with the threat of high oil prices, the demand for oil -- which could further weaken the market – might move into an over-supply situation unless
●
OPEC takes action soon. This may lead to weaker prices next year and has led hedge funds and other traders to take up short positions in an anticipation of lower prices to come. Tighter market. However, falling oil prices are a normal market reaction after hurricanes, as happened following Hurricane Ivan in 2004. The anticipation of hurricanes typically pushes prices above that justified by actual supply and demand balances. Market signals are pointing to tighter rather than weaker market conditions, although there are problems with the accuracy of the numbers, especially in the United States in the post-hurricane chaos.
Demand. On the demand side, there is so far little sign of any response to high prices, although the International Energy Agency (IEA) and others have been lowering their demand forecasts for both 2005 and 2006. Demand strength has been largely driven Oil price USD per barrel
80 70 60 50 40 30 20
Dec-03
Jun-04
Nov-04
May-05
Oct-05
OIL PRICE TO STAY HIGH ON UPSIDE RISKS by economic growth – forecast at 3.0 per cent for 2006 – which shows few signs of slowing: ●
●
●
OPEC. OPEC countries are showing exceptionally strong demand for oil, fuelled by the sharp increase in oil revenues. In 2004, they added 350,000 barrels per day (b/d) to global demand and are expected to add around 450,000 b/d this year. China. In China, during the first half of the year, the government tried to ration demand. Initially demand stagnated but, since September, it has picked up again and China may add 500,000 b/d this year. United States. Earlier numbers suggesting lower demand in October appear to have been misleading, unsurprisingly since three-quarters of US consumption consists of light products that are unresponsive to higher prices in the short term. Also, where dual firing capability exists, exceptionally high natural gas prices have helped boost oil demand. By late September, natural gas prices had risen 140 pr cent, while crude prices had risen 30 per cent year-on-year.
Oil demand is also affected by winter weather. If the current forecasts of an exceptionally cold winter in the northern hemisphere prove to be correct, this could significantly increase demand. Supply. On the supply side, both non-OPEC and OPEC may disappoint in terms of additions to capacity and supply: ●
Non-OPEC. Non-OPEC supply is being revised downwards, as anticipated projects face increasing delays due to constrained capacity in the service industry and the aftermath of the hurricanes: OECD. Production is expected to decline by 850,000 b/d in mature OECD economies this year. Russia. Russia is a cause for concern. Political uncertainty, inflation and rouble appreciation – plus a burdensome fiscal regime – all increase
costs and reduce profitability, inhibiting production growth and discouraging further investment. While there are signs of greater resources being invested in upstream activities and the service industry globally, the long lead time on projects means these will not bear fruit for a number of years. ●
OPEC. OPEC countries are currently producing around 30 million b/d, although the official quota is only 28 million b/d: Spare capacity. The IEA estimates OPEC capacity of 32.1 million b/d at the end of 2005, while the US Energy Information Administration puts the surplus in October at only 1–1.5 million b/d. Saudi Arabia has promised to meet shortfalls in crude supply but refused to discount the price of its heavy sour crude, leading to few takers. It is unlikely that significant extra capacity will emerge outside of Saudi Arabia, although OPEC is expected to increase its natural gas liquids production by some 350,000 b/d. While part of this lack of progress can be explained by service industry constraints, there is also a reluctance to invest in greater capacity – the OPEC problem of managing over-supply. 2006 projections. Expectations of increased supply will vary between 700,000 b/d and 1 million b/d by the end of 2006. This will largely consist of light sweet crude, which may alleviate some of the constraints facing refineries. However, the worsening situation in Iraq suggests that assumptions of steady production of 1.8 million b/d or more for next year are too optimistic. Refining shortage. A shortage of upgrading refinery capacity also remains a problem. This was aggravated by the hurricanes – which took out a significant amount of upgrading capacity on the US Gulf Coast – pushing up the price of light sweet crude. However, unlike last year, Saudi Arabia’s refusal to discount heavy crude has meant the light–heavy differential has not widened in the way it did in late 2004.
4
283
THE MIDDLE EAST AND NORTH AFRICA Upside risks. Unless GDP growth collapses, the market looks as though it will remain tight throughout 2006. The market is still vulnerable to the threat of losing another major exporter through, for instance, another natural disaster. In such circumstances, a large price spike could be expected. However, in the second oil shock of 1979–1981, prices peaked at over US$90 per barrel in today’s money, and that was without speculators. If any market weakness does emerge, OPEC is likely to step in to protect the price. The cartel’s price target is uncertain but signs suggest that the floor price is probably
284
US$50 per barrel, which would put Brent on a floor close to US$54 per barrel and WTI near to US$56 per barrel.
CONCLUSION Even if the market weakens, OPEC is well placed to defend the price, while any potential shock to the market – such as another hurricane – will lead to a price spike. Oil markets will probably remain tight during 2006 and prices are likely to continue around their current levels. Risks are on the upside rather than the downside.
The Range of Country @ratings in the Middle East and North Africa Sylvia Greisman and Catherine Monteil Coface Country Risk and Economic Studies Department, Paris
COUNTRY @RATING SCALE
HIGHEST RISK
Middle East and North Africa Economic growth and credit risk 7%
C B
Emerging Countries A4 A3
World
A1
Latin America Near and Middle East
Central Europe
5% 4% 3% 2% 1%
A2
Industrialized Countries
CIS Subsaharan Africa
Emerging Asia European Union (15)
6.2%
6%
0%
5.3% 4.1%
3.7%
6.1%
300 5.5%
250 200
3.6%
3.5%
150 2.0%
100 0.7%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005e
50
4
0
Japan North America
LOWEST RISK
A regional country risk @rating represents an average of country @ratings weighted according to their contribution to the region’s production.
Country @ratings measure the average level of shortterm non-payment risk associated with companies in a particular country. They reflect the extent to which a country’s economic, financial and political outlook influences local caompanies’ financial commitments. They are thus complementary to @rating credit opinions on companies. The quality of risks associated with companies across the region, improving since 2002, stabilized in 2005 at a good level in a favourable economic environment with surging oil prices, dynamic investment and household consumption, and, in some cases, expanding manufacturing activity. After several upgrades in 2004, only Algeria’s rating was upgraded in 2005, from a positive watchlisted B to A4. The regional economy will continue to trend up in 2006 with company solvency unlikely to be jeopardized, provided that regional geopolitical
tensions remain under control. The level of risk associated with regional companies will nonetheless stay above the emerging country average. Revenues from hydrocarbon exports by the region’s oil economies, except Iraq, doubled in the past two years (2004 and 2005) amid rebounding world demand and surging barrel prices. Besides an accumulation of foreign exchange reserves that strengthened already healthy financial situations, the oil windfall’s impact spread through those economies fostering public and private investment and household consumption. In countries belonging to the GCC (Saudi Arabia, United Arab Emirates, Bahrain, Qatar, Oman and Kuwait) and in Algeria and Iran, infrastructure, industrial and property projects have been increasing. The construction sector has been particularly dynamic in Saudi Arabia and the United Arab Emirates. The wealth of those countries has also spread to other regional economies, via investment and remittances from expatriate workers. That has been particularly true for Egypt and Jordan. The increased revenues from the Suez Canal also reflects the intensification of trade flows involving oil countries.
285
THE MIDDLE EAST AND NORTH AFRICA With high oil prices expected to continue in 2006, companies in most of those economies should benefit from a buoyant environment conducive to good payment behaviour. Competition from Asia will, however further weaken companies in Mediterranean-rim countries. Although regional geopolitical instability has apparently not deterred the flow of business at this juncture, particularly in GCC countries, it has continued to cloud the outlook. Lebanon, already hampered by enormous public sector debt, will struggle to emerge from the political crisis triggered by the former prime minister’s assassination, which
has been affecting economic activity. In Syria, the risks of international isolation have not been good for the business climate. In countries allied with Washington and targeted by the Ben Laden-led movement, investment and tourism have been vulnerable to the terrorist risk as evidenced by the attacks in Egypt and Jordan. Iraq is still rocked by a chaotic situation hardly propitious for reconstruction projects. Although the electoral process has been running its course, risks of civil war have nonetheless not disappeared. In Iran, with the nuclear issue continuing to stoke fears in the international community, the unexpected election of
COFACE MAP OF COUNTRY @RATINGS
286
THE RANGE OF COUNTRY @RATINGS IN THE MIDDLE EAST AND NORTH AFRICA an ultraconservative president has increased the uncertainties surrounding that country. The Hamas victory in the Palestinian Territories has heightened uncertainties and now the resumption of the peace process appears compromised. Countries rated A2 Default probability is still weak even in the case when one country’s political and economic environment or the payment record of companies is not as good as in A1-rated countries. In the United Arab Emirates, booming hydrocarbon revenues have been driving one of the
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most diversified economies in the region. The boom spurred investment, particularly in Dubai, in the downstream oil industry, services, property and infrastructure. Economic activity should continue to trend up throughout 2006 considering the very bright oil market outlook. However, the excess stock of developed property and rising prices for basic materials could affect the construction sector and cause a growth slowdown. Qatar’s success story continues. After two years of double-digit growth stemming from a substantial increase in capacity in gas production and derivative industries, the economic and financial
COFACE MAP OF MEDIUM- AND LONG-TERM COUNTRY RISK
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287
THE MIDDLE EAST AND NORTH AFRICA outlook has remained bright for 2006. Although the oil sector will register more moderate growth, the non-oil sector’s dynamism should continue. High raw material prices and expansionary fiscal policy will continue to buoy consumption and investment. Countries rated A3 Adverse political or economic circumstances may lead to a of worsening payment record that is already lower than the previous categories, although the probability of a payment default is still low. Although the Sultanate of Oman’s crude production continued to decline in 2005, the nonoil sector’s dynamism, spurred by soaring barrel prices, drove the economy. A liquid market spurred private consumption as well as investment in gasindustry and tourism development projects. Startup of a third tranche of liquid gas production and a slight recovery of oil production should accelerate growth in 2006.
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Countries rated A4 An already patchy payment record could be further worsened by a deteriorating political and economic environment. Nevertheless, the probability of a default is still acceptable. Very favourable oil market conditions, strict economic policy, and active foreign debt management have bolstered Algeria’s economic and financial situation. A significant accumulation of foreign exchange reserves has accompanied a decline in debt ratios. The economy should continue to trend up in 2006, driven by oil prices, increased oil and gas production capacity, and continuation of the growth stimulation programme (US$55 billion between 2005 and 2009). Government authorities have been taking advantage of the good economic conditions to continue structural reform implementation, thereby improving the business environment with company solvency remaining good. In Saudi Arabia, oil export revenues have been benefiting the entire economy, which should continue to post respectable growth rates in the prospect of very high oil prices. Abundant liquidity combined with the progressive opening up of stateowned companies has been buoying stock markets. ■
288
In that context, company solvency and payment behaviour have continued to improve. Although regional instability and terrorist threats have had no apparent effect on the economy thus far, the threats have nonetheless been a risk-aggravating factor. Israel has resumed dynamic economic growth since 2004, fuelled by the rebound of exports to the United States and Europe. An improved climate of security restored consumer and investor confidence and fostered the return of tourists. That good environment has bolstered the solvency and payment behaviour of companies, which should continue to benefit from an upward trending economy in 2006. Despite an export slowdown, domestic demand should remain dynamic, buoyed by the decline in unemployment and taxes. However, the Hamas victory has clouded prospects for a revival of the peace process. In Morocco, subject to good weather conditions, a satisfactory tourist season and an increase in foreign investment, forecasts for 2006 have projected 5.3 per cent growth after a gloomy year in 2005, attributable to bad weather and the impact on the textile sector of the multifibre arrangement’s dismantlement. Despite the weakness of some companies in that sector, particularly in clothing, payment incident frequency has nonetheless been moderate. In Tunisia, a good year for farming and tourism made it possible to offset the difficulties experienced by an industrial sector affected by rising energy prices and increased competition in world textile markets. However, those difficulties did not cause changes in company solvency with payment incident frequency remaining low. The outlook has been brighter for 2006. An expected export recovery, tourism and good performance by telecommunications sectors and the mechanical and electrical engineering industries should drive growth. Countries rated B An unsteady political and economic environment is likely to affect further an already poor payment record. In Egypt, companies should benefit from the upward economic trend. Foreign currency earnings
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THE RANGE OF COUNTRY @RATINGS IN THE MIDDLE EAST AND NORTH AFRICA growth and measures announced by the government made it possible to consolidate the Egyptian pound and restore consumer and investor confidence. The development of liquid gas exports should offset a tourism slowdown with both tourism and investment vulnerable to terrorist risk. A measured political liberalization process has emerged without causing upheaval thus far. However, the Muslim Brotherhood has been winning seats, establishing itself as the main opposition group. In Iran, expansionary fiscal policy has stimulated non-oil sector growth. With oil production reaching its limits, however, economic growth sagged overall. Heavy public spending and a highly liquid market have kept inflation high. Although reforms will be necessary to consolidate the conditions for growth, the good oil market situation and the new president’s policies could contribute to postponing their implementation. Rising tensions over the nuclear issue have been fostering a climate of uncertainty detrimental to the business climate and investment. In Jordan, economic growth was dynamic in 2005 fuelled by the activity of Iraqi business circles and by investment. Most economic sectors (manufactured goods, construction, transport, hotels, water and electricity) posted good performance. However, the suspension of crude oil donations from Saudi Arabia in conjunction with soaring barrel prices have undermined external accounts. In 2006, an austerity budget and discontinuation of fuel subsidies should make it possible to keep the public sector deficit under control. However, those measures will affect consumption and economic growth despite the steadiness of foreign investment. Countries rated C A very unsteady political and economic environment could deteriorate an already bad payment record. In Lebanon, the business climate deteriorated sharply after the assassination of former prime minister, Raffic Hariri, in February 2005. The political upheavals have had a negative impact on tourism and investment, triggering a growth ■
slowdown. An economic recovery will depend on the country’s capacity to overcome community divisions and restore consumer and investor confidence. Sovereign risk has remained very high due to the extent of public sector debt. Implementation of reforms to consolidate public finances constitutes a priority that would make it possible to mobilize international aid. In Libya, economic activity will continue to trend up in 2006, buoyed by private consumption and public investment. The country needs foreign investment to increase oil production capacity and diversify an economy too vulnerable to an oil market downturn. Although its rehabilitation within the international community has restored investor confidence, there has been scant evidence of promised structural reforms. Their effective implementation would help to dissipate the main elements of uncertainty still represented by the regime’s opacity and unpredictability. In Syria, since the fall of the Iraqi regime in 2003, the economy has been lagging and has struggled to recover, impeded by the decline of oil production. The non-oil sector has been the only growth driver, buoyed in 2004 by the rebound of foreign investment and tourism. The country’s situation as a rear base for Iraq has spurred consumption. However, escalating regional tensions and mounting international pressure, since the former Lebanese prime minister’s assassination in early 2005, have affected consumer and investor confidence. In that context, and considering the risks of isolation on the international scene, a sharp economic upturn will be unlikely in 2006. Countries rated D The high risk profile of a country’s economic and political environment will further worsen a generally very bad payment record. Iraq has been struggling to recover amid a persistently chaotic situation. The debt reductions expected in the Paris Club framework should bring the debt to a sustainable level. Although the country has kept to the political timetable despite the tensions, the prospects for institutional and economic consolidation have remained uncertain,
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THE MIDDLE EAST AND NORTH AFRICA still jeopardized by risks of civil war and secession. If the climate of insecurity persists, impeding consumption, investment, reconstruction and
290
economic growth should remain weak and continued American aid essential.
ALGERIA
Algeria Population (million inhabitants) GDP (US$ million)
31.8 66,530
Short-term: A4
Coface analysis
Medium-term: Quite low risk
STRENGTHS ● The country boasts substantial natural wealth (oil, gas) and the April 2005 hydrocarbon law opening the sector to foreign investors will facilitate its development. ● Europe provides Algeria with a vast market for its oil and gas. ● A fund for regulating oil revenues is intended to allow the country to cope with an economic downturn. ● The country has been engaged in a debt reduction and economic liberalization process.
RISK ASSESSMENT Exceptionally good oil-market conditions, tight economic policy and proactive foreign debt management have bolstered the country’s economic and financial situation. Improvement in debt ratios has been accompanied by a significant increase in foreign reserves to a level twice that of foreign debt. The economy should continue to perform well in 2006, buoyed by oil prices, increased oil and gas production capacity and the continuation of the five-year growth consolidation plan (2005–2009). The abundant oil revenues have, moreover, provided the means to ease social tensions, at the likely expense of loosening fiscal discipline.
WEAKNESSES The economy has remained dependent on the hydrocarbon sector and vulnerable to a sustained decline of market prices. ● Budgetary spending rigidities have persisted due to the financial burden of unprofitable state-owned companies with bloated payrolls. ● The high unemployment rate has been a source of social tensions and constitutes a major constraint on the economy. ● Inadequate infrastructure, excessive red tape and banking sector deficiencies have impeded investment. ●
4
In the longer term, the emergence of a private sector capable of taking over from the state in sustaining growth and creating jobs will depend on the upgrading of the institutional framework and banking system. In carrying out reforms, government authorities have benefited from a political base bolstered by President Bouteflika’s reelection in April 2004 and adoption of the charter for peace and national reconciliation by referendum with a large majority in October 2005. Considering the extensive social and political resistance, however, many blocking factors could impede a successful outcome.
291
THE MIDDLE EAST AND NORTH AFRICA MAIN ECONOMIC INDICATORS US$ billions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
2001
2002
2003
2004
2005(e)
2006(f )
2.6 4.2 3.4 19.1 9.5 9.6 7.1 13.0 41.1 21.4
4.1 1.4 0.2 18.7 12.0 6.7 4.4 7.8 40.5 20.7
6.9 2.6 5.1 24.5 13.3 11.1 8.8 13.3 35.1 16.5
5.3 4.0 5.8 32.2 18.0 14.3 10.9 13.2 26.4 15.2
6.0 3.7 11.3 45.7 22.1 23.6 20.2 21.6 20.1 9.1
5.5 3.5 11.9 48.2 27.0 21.2 17.8 17.6 16.7 9.2
15.1
16.0
20.1
19.5
22.7
23.5
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview The association agreement between Algeria and the EU came into force on 1 September 2005 and provides for immediate as well as gradual dismantling of tariff barriers for industrial products divided into three lists. It abolishes duties levied on certain intermediate goods and raw materials, as well as phasing out duties on some finished goods over a five-year period starting from 1 September 2007. Finally, it provides for the dismantling of customs duties on other finished goods, especially those currently taxed at 30 per cent, over a ten-year period commencing on the same date. Protocols between Algeria and the EU are in place for the gradual liberalization of trade in agricultural products and foodstuffs. From 1 September 2005, annual tariff quotas are applicable to certain processed farm products on a ‘first-come, first-served’ basis. Further information can be obtained from
[email protected]. Provisional additional duty (DAP), introduced in 2001, was abolished at the end of December 2005. France remains Algeria’s largest supplier (25 per cent market share), with the EU accounting for more than 58 per cent of the country’s imports. The low capitalization of many recently established Algerian companies and the lack of
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transparency of their balance sheets hamper the work of the few audit firms in the marketplace. The most widely recommended means of payment is the bill of exchange and, in its absence, the documentary bill. People doing business with Algeria should check the reputation of their customer's bank. The country’s cumbersome banking procedures continue to pose problems. Attitude towards foreign investors Algeria does not discriminate between local and foreign investment in manufacturing and services (construction, capacity extension, rehabilitation, privatization-related buy-ins or buy-outs) or investments made in connection with the award of concessions and/or licences (Decree No 01–03 of 20 August 2001). Identical preferential tariffs and tax concessions to encourage investment are granted to locals and foreigners. Wholly foreignheld subsidiaries are permitted to operate in most sectors open to private investment, including financial services. The law guarantees repatriation of all capital invested and earnings. A certain number of sectors (telecommunications, sea and air transport, electricity and gas supply, mining) have been opened to private investment. Even the oil and gas sector was opened to foreign competition in early 2005. In general, ‘productive’ investment is welcome. Conversely, trade and retail activities are not open to foreign investment. Fee transfers
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ALGERIA relating to services and intangible investments (royalties etc) continue to pose problems. Foreign exchange regulations The dinar is fully convertible for imports of goods and equipment. However, exchange controls are in place for the settlement of service contracts invoiced
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in foreign currency for which central bank permission is required. It should be noted, however, that the Bank of Algeria has recently relaxed its regulations in respect of dividend transfers: the central bank now intervenes only a posteriori to control the primary banks – not investors – authorized to carry out such transfers
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293
THE MIDDLE EAST AND NORTH AFRICA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 33 ■ Public consumption 11 ■ Investment 24
Exports: 39% of GDP
Imports: 24% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
5000
5000
4000
4000
3000
3000
2000
2000
1000
1000
0
0 Italy
USA
France
Spain
Canada
France
Italy
Spain
Germany
China
IMPORTS by products ■ All food items 22% ■ Chemical products 12% ■ Other manufactured products 22% ■ Capital goods and transport equipment 39% ■ Miscellaneous 5%
EXPORTS by products ■ Fuels 98% ■ Miscellaneous 2%
STANDARD OF LIVING / PURCHASING POWER
294
Indicators
Algeria
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
5,930 1,930 0.722 26.8 59 33.9 69 7.7
Regional average DC average 5,860 2,390 0.708 26 59 35 135 38
4,300 1,280 0.697 33 43 31 112 28.4
BAHRAIN
Bahrain Population (inhabitants) GDP (US$ million)
712,000 7,935
Short-term: A3
Coface analysis
Medium-term: Quite low risk
STRENGTHS ● The economy is open and diversified (hydrocarbons, aluminium, financial services and tourism). ● Offshore banks have made Bahrain the region’s leading financial centre with Islamic banks, in particular, developing rapidly. ● The kingdom enjoys close relations with the United States and the freetrade agreement has paved the way for exports to that country. ● Bahrain is engaged in a democratization process.
RISK ASSESSMENT In 2005, growth accelerated thanks notably to the start-up of a fifth aluminium production line and expansion of financial services. Oil revenues, buoyed by soaring market prices, have underpinned public sector investment spending. Economic activity should trend up in 2006 provided barrel prices remain high. In that context, financial services, spurred by a buoyant regional economic environment, should continue to drive growth. Thanks to the steadiness of oil revenues, external accounts have been in surplus and, after debt amortization, have provided financing capacity.
WEAKNESSES The country has only very limited oil reserves of its own and Saudi Arabia has discontinued its oil donations. ● Diversification notwithstanding, the economy has remained very dependent on revenues from the hydrocarbon sector. ● Large industrial and infrastructure projects have caused foreign debt to increase. ● The Shi’ite majority has been an element of instability in that monarchy controlled by the Sunni minority. ● Unemployment has been high in the kingdom, and labour market reform could undermine the economy’s competitiveness in the short term. ●
4
With the foreign debt burden still representing a moderate constraint at this stage, the financial situation should not constitute a source of difficulty, particularly with the kingdom enjoying access to financial markets and also counting on foreign investment. Public sector accounts, meanwhile, have been more sensitive to a possible oil price decline, which would then deter investment. Growth of foreign debt will nonetheless ultimately constitute a source of weakness. However, the liberal policy and the structural reform and privatization programme have reassured investors.
295
THE MIDDLE EAST AND NORTH AFRICA MAIN ECONOMIC INDICATORS US$ billions
2001
2002
2003
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
4.6 -1.2 0.8 5.6 4.1 1.5 0.1 1.8 46.8 4.4
5.1 -0.5 -3.9 5.8 4.7 1.1 -0.6 -7.3 47.6 5.5
7.2 1.6 -2.0 6.6 5.1 1.5 -0.1 -1.4 54.0 5.6
2.0
2.2
2.4
2004
2005(f )
2006(f )
5.4 5.3 0.7 7.6 6.1 1.5 0.4 3.7 56.3 6.2
9.2 3.1 2.9 9.9 7.7 2.3 1.2 9.0 56.9 6.7
9.0 2.2 0.9 10.3 8.0 2.3 1.4 9.2 61.3 7.8
2.3
2.1
2.0 f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview The Kingdom of Bahrain pursues a liberal trade policy designed to attract maximum FDI, diversify the country’s economy and reduce its dependence on oil and gas. A WTO member from the outset, Bahrain has a long trading tradition and is one of the most open countries in the Gulf. It has demonstrated this time and again since 2001 by taking measures to open up trade before its GCC neighbours. These include granting permission to foreign companies to acquire a 100 per cent stake in a Bahraini company, introducing anti-money laundering regulations, and harmonization its customs tariffs with the GCC common external tariff from 2003. Customs duties on imports from non-GCC countries are 5 per cent for all but 53 duty-free products, and alcohol and cigarettes are liable to 125 per cent and 100 per cent duty respectively. Under the GCC free trade agreement, any product with a 40 per cent GCC component is admitted duty free by member countries. The decree of 13 March 1998 allows foreign companies to use the services of several agents in Bahrain. The country remains the financial centre of the region, facilitating the creation of financial institutions, banks and insurance companies by
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296
means of highly flexible regulations and attractive tax laws, administered by the Bahrain Monetary Agency, the country’s central bank. Attitude towards foreign investors Bahrain offers foreign companies a highly attractive legal and tax environment, including:
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● ● ●
● ●
●
no corporation tax, income tax, money transfer tax or VAT; unrestricted foreign investment in projects; up to 100 per cent foreign ownership of local companies in certain sectors (information and communication technologies, healthcare, tourism, training, services, manufacturing); easy movement of persons (visa at airport); no customs duties on goods intended for reexport and for manufacturing machinery and equipment); possibility for foreigners to acquire land.
The foreign investment-friendly Bahrain government has also set up an Economic Development Board to facilitate and speed up administrative formalities. The board, which has been in operation since 2001, liaises closely with the Ministry of Trade and Industry and runs a fasttrack registration procedure for companies.
BAHRAIN OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 30 ■ Public consumption 11 ■ Investment 8
Exports: 81% of GDP
Imports: 59% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
2000
400 350 300 250 200 150 100 50 0
1500 1000
4
500 0 USA
India
South Korea
Saudi Arabia
UAE
Saudi Arabia
USA
Japan
UK
Germany
IMPORTS by products ■ All food items 20% ■ Agricaultural raw materials 7% ■ Fuels 8% ■ Chemical products 11% ■ Other manufactured products 32% ■ Capital goods and transport equipment 20% ■ Miscellaneous 2%
EXPORTS by products ■ Fuels 71% ■ Ore and metals 17% ■ Manufactured goods 11% ■ Miscellaneous 1%
STANDARD OF LIVING / PURCHASING POWER Indicators
Bahrain
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
16,180 10,850 0.846 n/a 92 27.6 267 144
Regional average DC average 5,860 2,390 0.708 26 59 35 135 38
4,300 1,280 0.697 33 43 31 112 28.4
297
THE MIDDLE EAST AND NORTH AFRICA
Egypt Population (million inhabitants) GDP (US$ million)
67.6 82,427
Short-term: B
Coface analysis
Medium-term: High risk
STRENGTHS ● Egypt has diversified sources of foreign currency: Suez Canal, tourism, private transfers, oil and gas exports. ● Foreign exchange reserves have been at comfortable levels with foreign debt remaining moderate. ● With its regional mediator role, Egypt can rely on political and financial backing from Western countries. ● Since July 2004, the country has resumed work on a structural reform programme intended to improve conditions for economic growth.
RISK ASSESSMENT The growth recovery has firmed up. Increased foreign currency earnings in conjunction with measures announced by the government have made it possible to consolidate the Egyptian pound and restore consumer and investor confidence. The outlook for 2005–2006 and 2006–2007 is still good. The growing volume of liquid gas exports should offset a limited downturn of tourism, affected by the terrorist attacks. Public sector deficits have remained very large, however, due to the debt service burden and stimulatory tax measures that have undermined fiscal revenue growth. The public debt trend is a
298
WEAKNESSES Rigid budgetary spending (debt interest, wages and subsidies) has been undermining government finances. ● The domestic debt level has been a constraint for an economy with substantial infrastructure needs. ● The investment rate has been low in relation to Egypt’s development needs. ● The tourism sector, whose revenues are fundamental to the current account balance and economic activity, is vulnerable to the terrorist threat. ●
matter of concern. The government is reactivating structural reforms, especially privatizations, to consolidate its finances. The process could be long and restructuring public entities will be costly. Politically, anti-American feeling, regional instability and social tensions have been playing into the hands of radical Islamist movements, perpetuating high terrorist risk that could affect tourism and investment. A prudent political liberalization process has been slowly emerging, without causing an upheaval thus far; President Mubarak has been re-elected and his NPD party still holds a parliamentary majority.
EGYPT
MAIN ECONOMIC INDICATORS (financial year ending 30 June) US$ billions Economic growth (%) Inflation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance** Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2001/02 2002/03 2003/04 2004/05(e) 2005/06(f ) 2006/07(f )
3.2 2.4 -10.8 7.1 14.6 -7.5 -0.5 -0.6 33.3 10.5
3.3 3.2 -9.8 8.2 14.8 -6.6 1.8 2.2 36.1 10.1
4.2 8.1 -10.2 10.5 18.3 -7.8 2.5 3.2 37.9 9.4
4.9 8.8 -8.9 13.8 24.2 -10.4 1.8 2.0 32.2 8.0
5.4 6.0 -9.7 18.2 28.4 -10.2 1.0 0.9 30.1 5.8
5.3 6.8 -8.7 19.2 30.9 -11.8 -0.5 -0.4 25.8 8.4
7.6
8.0
6.8
6.9
7.6
7.4
excluding donations **excluding official transfers
e = estimate, f = forecast
*
CONDITIONS OF ACCESS TO THE MARKET Market overview Generally speaking, the Egyptian economy is opening up on the back of government initiatives to revive growth through private enterprise and market forces. While the pace of reform is bound to be gradual, there will be new opportunities for firms in the consumer and capital goods sectors.
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Means of entry Wide-ranging tariff reforms were introduced in 2004, including a 35 per cent reduction in customs duties on average and a simpler tariff nomenclature. However, rates applicable on the ground are usually set in a haphazard and subjective manner, accompanied by often arbitrary customs valuations. Numerous non-tariff barriers remain in place, despite a programme to streamline customs organization. Government departments and agencies are required to meet their procurement requirements through local suppliers for a number of products (telephone equipment, furniture, cars, tyres, bulbs, pipes etc), as imported goods may be purchased only where there is no local substitute. The merging, in 2000, of the various inspection agencies into the General Organization for Import
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and Export Control (GOEIC), responsible for coordinating import and export inspection procedures, as well as the recent approval of international certification firms, should undoubtedly help to simplify procedures. Exporters and importers can also qualify for simplified inspections by registering on ‘white lists’. The commitments contracted by Egypt to the WTO, as well as the association agreement with the EU that came into force on 1 June 2004, should also speed up the opening of numerous sectors in the medium term. Attitude towards foreign investors The law guarantees the transfer and repatriation of capital and offers local and foreign investors alike longer-term tax incentives if their businesses are located in a new industrial town or in the high or middle Nile Valley. Plans are under way to privatize a number of sectors, including telecommunications and banking. The government has set up a committee charged with resolving disputes arising from the application of the investment act and ensuring coordination between the various ministries and the General Authority For Investment (GAFI. A circular issued in 2001 significantly raises the equity threshold for the foreign partners of an Egyptian-based company applying for a work permit in Egypt.
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THE MIDDLE EAST AND NORTH AFRICA 2004 on the back of a better supply of foreign exchange on the local market. This abundance of foreign exchange has caused the Egyptian pound to appreciate since the beginning of the year. For payments, the irrevocable and confirmed documentary letter of credit is strongly recommended and widely used.
Foreign exchange regulations The Egyptian pound is officially convertible. There are no legal restrictions on the repatriation of income and profits by foreign companies. Although the currency market continues to be partially administered by the central bank, the parallel market has been steadily shrinking since autumn
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PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Egypt
250
200
150
100
50
5
4
D
ec
-0
04
-0 ec
ne
D
Ju
3
04
-0
ne
ec D
Ju
2
03
-0 ec
ne
D
Ju
1
02
-0 ec
ne
D
Ju
0
01
-0
ne
ec D
Ju
9
00
-9 ec
ne
D
Ju
8
99
-9 ec
ne
D
Ju
7
98
-9
ne
ec
ec
D
Ju
Ju
D
300
ne
-9
97
6
0
EGYPT OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 58 ■ Public consumption 10 ■ Investment 14
Exports: 22% of GDP
Imports: 24% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
1200
3000
1000
2500
800
2000
600
1500
400
1000
200
500
0
0 USA
Italy
UK
France Germany
USA
Germany France
China
Saudi Arabia
4
IMPORTS by products ■ All food items 25% ■ Fuels 5% ■ Chemical products 12% ■ Other manufactured goods 17% ■ Capital goods and transport equipment 19% ■ Agricultural raw material 5% ■ Miscellaneous 17%
EXPORTS by products ■ Fuels 43% ■ Chemical products 7% ■ Other manufactured goods 23% ■ All food items 8% ■ Agricultural raw material 7% ■ Miscellaneous 11%
STANDARD OF LIVING / PURCHASING POWER Indicators
Egypt
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
3,940 1,390 0.659 29.5 43 33.5 127 21.9
Regional average DC average 5,860 2,390 0.708 26 59 35 135 38
4,300 1,280 0.697 33 43 31 112 28.4
301
THE MIDDLE EAST AND NORTH AFRICA
Iran Population (million inhabitants) GDP (US$ million
66.4 137,144
Short-term: B
Coface analysis
Medium-term: Moderately high risk
STRENGTHS ● Iran is the second OPEC producer and its gas reserves are the world’s largest after Russia. ● The non-oil sector has been developing, spurred by structural reforms implemented in recent years. ● During the 1992 and 1998 financial crises, government authorities demonstrated their capacity to restore external account equilibrium.
RISK ASSESSMENT The oil boom has prompted government authorities to pursue expansionary fiscal policy that should strengthen private consumption and investment and thereby spur non-oil sector growth. The manufacturing and services sectors would benefit from the more dynamic demand. Oil production has reached its limits, however, causing growth to decline overall. The inflation rate has remained high, spurred by the extent of public spending and abundant liquidity in the market. The country has nonetheless continued to consolidate its financial situation. It has been
302
WEAKNESSES The economy has remained dependent on oil income. ● The legislative and political framework has not been conducive to partnerships with foreign companies or to FDI, and the public sector has remained predominant. ● Relations with the United States, which has stigmatized the country as belonging to an ‘axis of evil’, have been hindering investment. ● The discord between Iran and the international community over the country’s nuclear programme has been a major element of uncertainty. ●
running fiscal and external surpluses and building up foreign currency reserves whose growth has remained limited by the sharp increases in public spending and imports. The economy has remained vulnerable to a still possible decline in oil prices. Although reforms are thus still necessary to consolidate the conditions for growth, the good oil-market conditions and the new president’s policies could contribute to postponing their implementation. Rising tensions over the nuclear issue have been fostering a climate of uncertainty detrimental to the business climate and investment.
IRAN MAIN ECONOMIC INDICATORS (fiscal year ending 20 March) US$ billions Economic growth (%) Inflation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS%T exports) Foreign exchange reserves (in months of imports)
2001/02 2002/03 2003/04 2004/05(e) 2005/06(f ) 2006/07(f )
3.7 11.4 2.0 23.9 18.1 5.8 6.0 7.0 8.5 7.9
7.5 15.8 2.6 28.2 22.0 6.2 3.7 3.2 8.0 6.5
6.7 15.6 2.1 34.0 29.6 4.4 0.8 0.6 9.0 5.6
4.8 15.2 5.1 44.4 36.6 7.8 4.0 2.5 10.4 4.9
4.6 17.5 6.5 57.8 42.3 15.5 10.7 6.0 9.9 4.3
4.3 17.3 6.0 58.6 46.0 12.6 7.7 3.7 9.1 4.5
9.5
9.2
8.0
8.6
9.5
9.2
including revenues allocated to the Oil Stabilization Fund
e = estimate, f = forecast
*
CONDITIONS OF ACCESS TO THE MARKET Market overview Iran’s customs tariff, whose raison d’être remains the protection of local producers, has been amended in the last three years to enable the country to switch from a non-tariff to a tariff system that eventually complies with WTO rules. Launched on 21 March 2002, this process has involved the unification of exchange rates resulting, in some cases, to a reduction in duties. There is still a ban on imports of non-Islamic products (wines and spirits, non-halal meat etc). Payments for imported goods are primarily made by documentary credit issued through Iranian banks. ■
Attitude towards foreign investors The law on foreign investment incentives (FIPPA), passed in 2002, maintains the requirement to obtain government approval for all investment. The sole body in charge of foreign investment is OIATEI (Iranian Economic and Technical Assistance and Investment Organization), headed by the Deputy Minister of Economic Affairs. The vetting of investment applications is the responsibility of an inter-ministerial body called the Foreign Investment Commission.
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Foreign investment can take the form of direct investment in sectors open to the private sector, or buy-back and BOT contracts in other sectors. To prevent the creation of monopolies, the law sets a ceiling on foreign operations in the country. The total value of goods and services delivered by foreign investment may not exceed 25 per cent and 35 per cent market share respectively of the sector and subsector in question. However, a foreign investor may now hold a 100 per cent stake in an Iranian company. On 12 May 2003, France and Iran signed an investment promotion and protection agreement, which was ratified by the two countries and came into force on 12 November 2004. The agreement represents a significant step forward in that it allows for international arbitration for the settlement of disputes. With regard to taxation, the reforms undertaken in 2002 slashed corporation tax from 54 per cent to 25 per cent and offer big incentives to local and foreign firms.
4
Foreign exchange regulations On 21 March 2002, the two exchange rates were unified into a single market rate (US$1:IRR9,100). The administered exchange rate has been abolished. Subsidies are now included in the accounts of recipient undertakings.
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303
THE MIDDLE EAST AND NORTH AFRICA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 35 ■ Public consumption 11 ■ Investment 33
Exports: 25% of GDP
Imports: 23% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
8000 7000 6000 5000 4000 3000 2000 1000 0
3500 3000 2500 2000 1500 1000 500 0 Japan
China
Italy
Taiwan
Turkey
Germany
France
China
Italy
UAE
IMPORTS by products ■ All food items 10% ■ Fuels 6% ■ Chemical products 12% ■ Other manufactured products 21% ■ Capital goods and transport equipment 46% ■ Miscellaneous 5%
EXPORTS by products ■ Fuels 86% ■ Manufactured goods 9% ■ Miscellaneous 6%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
304
Iran 7,000 2,010 0.736 33.7 66 29.5 220 90.5
Regional average DC average 5,860 2,390 0.708 26 59 35 135 38
4,300 1,280 0.697 33 43 31 112 28.4
IRAQ
Iraq Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
24.7 25,539 1,034
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT After suffering 25 years of dictatorship, three wars, and 12 years of embargo, the country has been struggling to recover amid persistent chaos. Oil installation sabotage and pervasive insecurity have been affecting growth and prices. The economy has remained largely dependent on American aid. The country nonetheless has great potential, particularly in oil, and the debt reduction expected in the Paris Club framework (cancellation of 80 per cent of the debt followed by rescheduling of the
balance starting in 2011) should restore the debt burden to sustainable levels. Although the political timetable has been kept despite the tensions, prospects for institutional and economic consolidation have remained uncertain, still compromised by risks of civil war and secession. Ethnic and religious differences have been complicating the process of restoring the rule of law. If the climate of insecurity persists, impeding consumption, investment and reconstruction, growth should remain feeble and continued US aid indispensable.
4
MAIN ECONOMIC INDICATORS US$ billions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP)
-6.0 29.0 n/a 15.8 10.8 5.0 1 3.3 550
-6.5 15.0 n/a 12.5 9.4 3.1 0 -2.5 724
-21.8 36.3 -42.0 9.3 7.3 2.0 2 20.8 974
46.5 32.0 -50.0 17.8 19.6 -1.8 -4 -15.9 306
3.7 20.0 -33.5 23.2 24.1 -0.9 -1 -2.6 280
16.8 12.0 -11.0 30.8 28.1 2.7 3 7.4 221
305 e = estimate, f = forecast
THE MIDDLE EAST AND NORTH AFRICA
Israel Population (million inhabitants) GDP (US$ million)
6.7 110,227
Short-term: A4
Coface analysis
Medium-term: Quite low risk
STRENGTHS ● The economy is diversified and open. ● Development of advanced technology industries has been a growth factor, nonetheless dependent on the cyclical American market. ● Israel can rely on political and financial backing from the United States and the diaspora, with government default risk mitigated by the United States’ guarantee for part of public sector borrowing.et. ● The withdrawal from Gaza proceeded without major incident.
306
RISK ASSESSMENT The country has returned to robust growth since 2004, spurred by the rebound of exports to the United States and Europe. An improved security situation has buoyed consumer confidence and encouraged tourists to return. Fiscal austerity in conjunction with the increase in tax receipts resulting from the growth has made it possible to reduce the public sector deficit. Revival of the privatization process spurred the decline of public debt. Despite deterioration of the trade balance in 2005, external accounts remained in surplus thanks to the steadiness of services while an influx of foreign capital bolstered the financial situation. In that context, the Coface payment incident index has improved while remaining below the world average.
WEAKNESSES The situation of conflict with the Palestinian authority has affected the budget and economic activity. ● The accumulation of fiscal deficits has increased public sector debt to levels exceeding 100 per cent of GDP. ● Pervasive insecurity and fiscal austerity measures have affected the social climate. ● Short-term debt has been high. ● The political landscape is characterized by an electoral balkanization that gives rise to shaky government coalitions, not very conducive to economic policy continuity. ●
Economic activity will continue to trend up in 2006. Although exports may sag, domestic demand should remain dynamic, buoyed by easing unemployment and lower tax. However, the economy remains vulnerable to a worsening of the security situation and a downturn in investor confidence. Political uncertainties have been very high since Sharon’s exit from the political scene and, above all, the Hamas victory in the Palestinian elections. This new order could impact the general elections in March. It has become unlikely that peace negotiations with the Palestinian Authority will be resumed.
ISRAEL MAIN ECONOMIC INDICATORS US$ billions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2001
2002
2003
2004(f )
2005
2006(f )
-0.9 1.1 -4.4 27.8 31.0 -3.2 -2.1 -1.8 57.0 17.5
-0.7 5.7 -3.8 27.3 31.2 -3.9 -1.8 -1.7 64.6 15.8
1.3 0.7 -5.6 30.2 32.3 -2.2 0.9 0.8 64.7 15.7
4.3 -0.4 -3.9 36.6 38.5 -1.9 1.5 1.3 63.5 10.1
4.8 1.2 -1.9 40.2 43.7 -3.5 0.8 0.6 60.5 9.6
4.3 2.3 -3.0 43.6 46.8 -3.2 1.2 1.0 59.1 9.6
5.5
5.9
6.2
5.6
5.1
4.8 f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview With estimated per capita GDP at €15,000 and consumption patterns similar to those in southern Europe, Israel has similarities with an OECD country. The cost of living in Israel, while comparable to the European average, has fallen today mainly due to the US dollar’s sharp rise against the shekel. The Israeli market thus offers EU firms real opportunities in the form of ordinary business deals and joint ventures, regardless of sector. Israel’s economy is already largely liberalized. The government continues to pursue its policy of structural reform (reduction of the public sector by means of a sustained privatization programme, restructuring of the social welfare system, use of BOT contracts to finance public infrastructure projects etc) and aims to put its finances in order by bringing public spending under control and lowering VAT by 1 per cent. The worsening security situation, while impossible to ignore, will slow growth only by a fraction.
■
passed with 12 other countries, including Turkey, Canada, the Czech Republic, Poland, Hungary and Mexico. Except for some agricultural products, goods covered by the major free trade agreements may be imported into Israel duty free. They remain, however, liable to 16.5 per cent VAT. A variable sales tax is levied on some consumer goods. Under the Public Tender Act, foreign bidders are often subject to offsetting arrangements that amount to at least 30 per cent of the tender’s total value.
4
Attitude towards foreign investors Israeli legislation contains various measures designed to encourage investment, whether local or foreign. Foreign investment is fairly unregulated (applications must be filed to claim any benefits, however), except in protected sectors such as defence and some utilities. There are no restrictions on commercial payments between Israel and foreign
■
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Israel
250
200
150
100
50
4
05 D ec -0 5
-0 D ec
Ju ne
2 -0
03 D ec -0 3 Ju ne 04
D ec
Ju ne
01 D ec -0 1 Ju ne 02
00 D ec -0 0
Ju ne
99 D ec -9 9
Ju ne
D ec -9 8
Ju ne
97 D ec -9 7 Ju ne 98
D ec -9 6
0
Ju ne
Means of entry Israel is one of the rare countries in the world to have a free trade agreement with both the EU and the United States. Similar agreements have been
■
307
THE MIDDLE EAST AND NORTH AFRICA countries, nor are there any restrictions on the transfer or repatriation of profits, dividends and financial receivables, after payment of Israeli taxes.
However, regulations in respect of foreign workers have become stricter.
OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 42 ■ Public consumption 22 ■ Investment 11
Exports: 37% of GDP
Imports: 44% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
15000
6000
12000
5000 4000
9000
3000 6000
2000
3000
1000
0
0 USA
Belgium Hong Kong
UK
Germany
USA
Belgium Germany
UK
Switzerland
IMPORTS by products ■ All food items 6% ■ Fuels 11% ■ Chemical products 10% ■ Other manufactured goods 40% ■ Capital goods and transport equipment 29% ■ Miscellaneous 3%
EXPORTS by products ■ Chemical products 14% ■ Other manufactured goods 52% ■ Capital goods and transport equipment 26% ■ All food items 5% ■ Miscellaneous 3%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
308
Israel 19,440 16,240 0.915 28.2 92 27.4 458 242.6
Regional average DC average 5,860 2,390 0.708 26 59 35 135 38
4,300 1,280 0.697 33 43 31 112 28.4
JORDAN
Jordan Population (million inhabitants) GDP (US$ million)
5.3 9,860
Short-term: B
Coface analysis
Medium-term: Moderately high risk
STRENGTHS ● Although dependent on the regional situation, expatriate transfers have been a source of currency earnings. ● The customs-free areas and the free trade agreement with the United States have revitalized exports and attracted investors. ● The foreign debt burden has been limited thanks to reductions obtained in the Paris Club framework. ● The country has benefited from political and financial support from the international community, which has, however, been cutting back on aid. ● Jordan’s situation as a rear base for Iraq has spurred economic activity.
RISK ASSESSMENT After a strong recovery in 2004, economic growth was robust in 2005, buoyed by domestic demand. Activity linked to Iraq spurred consumption while an influx of regional capital did much the same for investment. Most economic sectors (manufactured products, construction, transport, hotels, water and electricity) performed well. However, the interruption of crude oil donations from Saudi Arabia and the upsurge of barrel prices caused severe deterioration of external accounts accompanied, moreover, by increased fuel subsidies that widened the fiscal deficit. In 2006, an austerity budget and elimination of fuel subsidies should make it possible to contain the
WEAKNESSES The country has limited natural resources (phosphate and potassium). ● Rising oil prices and the decline of international aid have exacerbated financial imbalances and made the country more dependent on volatile capital. ● The textile sector has suffered from dismantlement of the multifibre agreement. ● Social tensions have been high among a population mostly of Palestinian origin, affected by poverty and unemployment. ● At the centre of regional turmoil, the country has not escaped terrorism, disrupting tourism and investment. ●
4
public sector deficit. Those measures will affect consumption, however, and cause a growth slowdown. Authorities have reactivated the privatization process to cover government financing needs and limit development of public sector domestic debt, which has reached over 80 per cent of GDP. The steady inflow of foreign investments should again cover external financing needs. In the long term, although the balance of payments will be vulnerable to a loss of investor confidence, the country should nonetheless be able to count on international community support to avoid a foreign currency liquidity crisis.
309
THE MIDDLE EAST AND NORTH AFRICA MAIN ECONOMIC INDICATORS US$ billions Economic growth (%) Inflation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance* Current account balance (%GDP)* Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports) *
2001
2002
2003
2004
4.9 1.8 -3.6 2.3 4.3 -2.0 0.0 0.0 86.5 13.0
5.7 1.8 -4.9 2.8 4.5 -1.7 0.5 5.6 84.7 14.0
4.1 1.6 -1.0 3.1 5.1 -2.0 1.2 11.6 81.7 14.5
4.7
6.3
8.0
including donations
CONDITIONS OF ACCESS TO THE MARKET Means of entry The banking sector is generally sound and comprises many first-rate financial institutions that posted record profits in 2004 and early 2005. However, with 24 banks (of which seven are foreign-held, including Société Générale de Banque – Jordanie), it remains oversized in relation to the market. The central bank is striving to encourage mergers. Only one so far has been successful: that between Jordan National Bank and Philadelphia Investment Bank. Since the introduction of the Banking Act 2000, the Bank of Issue has strengthened prudential measures mainly by raising bad debt provisions (90 days instead of 180) and improving bank capitalization. By 2007, the minimum capital requirements for banks will be JOD40 million (approximately US$56.4 million), compared with JOD20 million today. In the hotel sector, where investment remains significant, particularly from the Gulf, Jordan’s role as regional hub, especially in the provision of supplies for Iraq, has helped boost occupancy as European tourists return to the country. Caution is called for when dealing with private Jordanian customers. Although bankruptcies remain few and far between, cases of late payment have been reported. Also, information on the
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310
2005(e)
2006(f )
7.7 3.4 -1.7 3.9 7.3 -3.4 0.0 0.0 72.9 10.2
6.3 3.8 -6.4 4.3 9.2 -5.0 -1.9 -15.0 66.0 9.8
4.0 9.4 -5.8 4.6 9.8 -5.3 -2.4 -16.3 58.1 9.1
6.2
4.7
3.8
e = estimate, f = forecast
creditworthiness of local firms remains hard to come by. For example, there is still no system for informing bankers in real-time as to the overall banking commitments made to a small customer (no declaration requirement below JOD30,000, or US$42,300). However, there have been moves towards greater transparency. In 2002, Jordan’s credit insurer merged its database with that of the Coface @rating network. The central bank’s risk unit collates client information provided by banks far more effectively now, even though it takes two months or more to obtain it. Nevertheless, in light of the fanciful nature of some declarations, exporters should check the credit history of potential customers and gather key information about them from local market sources so as to avoid unreasonable risk. Attitude towards foreign investors Apart from the first wave of privatizations that saw France become Jordan’s leading foreign investor in volume terms between 1998 and 2001, recent moves to open up other sectors of the economy (banking, retail, potassium, fixed and mobile telephony) have led to an influx of new players who exert a stabilizing influence and perform a market-leading role. The rule is equality of treatment between foreign and local investors. Moreover, Jordan’s membership of the WTO, the implementation of a
■
JORDAN free trade agreement with the United States and an association agreement with the EU and the structural reforms undertaken to modernize the economy (Amman Stock Exchange, introduction of VAT, industrial and intellectual property protection) are helping to bring the country closer into line with Western standards. The deteriorating
regional political situation has, if anything, led Jordan to redouble efforts to attract foreign investors via generous tax benefits and preferential access to US and European markets. There is also a reciprocal investment promotion and protection agreement, along with a double taxation treaty, between Jordan and France.
4
311
THE MIDDLE EAST AND NORTH AFRICA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 47 ■ Public consumption 14 ■ Investment 14
Exports: 45% of GDP
Imports: 70% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
800 700 600 500 400 300 200 100 0
800 700 600 500 400 300 200 100 0 USA
Iraq
Switzerland India
Saudi Arabia
Saudi Arabia
Germany
USA
Iraq
Italy
IMPORTS by products ■ All food items 18% ■ Fuels 17% ■ Chemical products 11% ■ Other manufactured goods 25% ■ Capital goods and transport equipment 23% ■ Miscellaneous 7%
EXPORTS by products ■ All food items 14% ■ Ores and metals 13% ■ Chemical products 20% ■ Other manufactured goods 36% ■ Capital goods and transport equipment 11% ■ Miscellaneous 7%
STANDARD OF LIVING / PURCHASING POWER
312
Indicators
Jordan
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
4,290 1,850 0.753 29.8 79 37.4 114 44.7
Regional average DC average 5,860 2,390 0.708 26 59 35 135 38
4,300 1,280 0.697 33 43 31 112 28.4
KUWAIT
Kuwait Population (million inhabitants) GDP (US$ million)
2.4 41,748
Short-term: A2
Coface analysis
Medium-term: Low risk
STRENGTHS ● Kuwait boasts very large oil reserves and has been progressively increasing its production capacity. ● Its financial position has been solid with oil reserves allowing it to accumulate considerable revenue-generating financial holdings abroad. ● Foreign debt has been moderate. ● The reconstruction of Iraq offers good prospects for Kuwait’s economy. ● The emirate has benefited from a strategic alliance with the United States as well as France, the UK and Russia.
RISK ASSESSMENT The high oil prices have buoyed economic activity by fostering expansionary and redistributive government policy. With the prospect of Iraq’s reconstruction, investment has been focused on infrastructure development. Household consumption has also been dynamic, spurred by rising wages and growth of the expatriate workforce. Economic conditions will remain buoyant in 2006. High barrel prices will continue to generate large external and fiscal surpluses and allow the
WEAKNESSES With little diversification, it has the most oildependent economy of all GCC countries. ● The welfare state tradition, enhanced by the country’s prosperity, has hindered reforms. Members of parliament have been reluctant to foreign investment, particularly in the upstream oil industry. ● Political instability in Iraq could affect investment. ● Uncertainties about succession questions have led to political inertia. ●
4
country to amass funds for future generations. The economy has had relatively little vulnerability to oil price declines. The oil export-revenue distribution system will ultimately have its limits. The country needs to reform its bloated public sector and open its economy. However, with the country’s good economic and financial health, there has been little incentive to act, not to mention the capacity for obstruction of members of parliament, the welfare state’s primary beneficiaries.
313
THE MIDDLE EAST AND NORTH AFRICA MAIN ECONOMIC INDICATORS (fiscal year ending 31 March) US$ billions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2001/02
2002/03 2003/04
2004/05(e)
2005/06(f ) 2006/07(f )
0.6 1.7 21.4 16.2 7.0 9.2 8.3 24.5 32.6 8.3
-0.4 1.4 24.8 15.4 8.1 7.2 4.2 12.0 35.1 9.1
9.5 0.9 22.2 21.8 9.9 11.9 9.4 22.5 31.3 6.9
6.3 1.1 27.5 30.2 10.9 19.3 18.9 36.4 26.5 5.6
5.6 3.3 32.4 43.6 12.6 31.1 30.0 44.5 22.3 4.6
5.3 2.5 27.4 46.4 14.8 31.5 29.5 41.5 22.5 4.7
7.9
6.7
4.7
4.6
4.4
4.5
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Means of entry Kuwait is a free market and, at 90 per cent, has one of the highest import to consumption ratios in the world. In line with the decision by the six member countries of the GCC to standardize their customs duties, Kuwait applies customs duty at a standard rate of 5 per cent ad valorem, with duty-free admission for numerous imported goods, including pharmaceuticals and food staples. Per capita income is high and demand for capital and consumer goods disproportionately large for a country of its size. But Kuwait is a much coveted market that demands special knowledge and perseverance, backed by close contact with ordering customers. Companies exporting to Kuwait are not required to have a sole local partner and may sell directly to several Kuwaiti importers. Since the restoration of relations with Iraq, Kuwait has regained its role as a hub serving both the vast Iraqi market, with its 25 million consumers, and Iran, with its large towns facing the Kuwaiti coast. ■
Attitude towards foreign investors Since the implementation, in 2003, of FDI Act No. 8/2001, the government has introduced 100 per
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314
cent foreign ownership of companies and ten-year tax exemption for foreigners. It has also drawn up a positive list of sectors open to FDI, with the exception of oil exploration and production, which remain closed. open sectors include light processing industries, tourism, hotels, leisure (foreigners may acquire real estate for their projects), culture, information, marketing, livestock breeding and farming, banking (BNP Paribas is the first foreign bank authorized to operate in the country), investment management and securities brokering, insurance and IT. Meanwhile, cuts in corporation tax for foreign companies from 55 per cent to 25 per cent have been announced under the government’s tax reform programme. The government is also planning to privatize a number of public enterprises as part of its policy of openness. A private company already runs stateowned petrol stations, while another has been selected to oversee the opening of upstream oil activities to international oil companies. The third-largest Gulf economy, with GDP of US$42 billion in 2004, Kuwait is a lucrative and solvent market underpinned by robust growth, a buoyant economy and institutional stability.
KUWAIT OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 40 ■ Public consumption 19 ■ Investment 6
Exports: 48% of GDP
Imports: 40% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
5000
2000
4000
1500
3000
1000 2000
500
1000 0
0 Japan
South Korea
USA
Singapore Taiwan
USA
Japan
Germany China
Saudi Arabia
4
IMPORTS by products ■ Consumer goods 44% ■ Intermediate goods 39% ■ Capital goods and transport equipment 16%
EXPORTS by products ■ Unrefined petroleum 86% ■ Miscellaneous 14%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
Kuwait 19,480 17,960 0.844 n/a 96 24.8 198 162.8
Regional average DC average 5,860 2,390 0.708 26 59 35 135 38
4,300 1,280 0.697 33 43 31 112 28.4
315
THE MIDDLE EAST AND NORTH AFRICA
Lebanon Population (million inhabitants) GDP (US$ million)
4.5 19,000
Short-term: C
Coface analysis
Medium-term: Very high risk
STRENGTHS ● Financial backing from the diaspora in conjunction with Arab capital has allowed the country to cushion the effects of its economic and financial difficulties. ● The banking sector has thus remained sound despite its exposure to sovereign risk. ● Tourism and financial services continue to play an important role in the economy.
RISK ASSESSMENT The political upheavals after the assassination of former prime minister, Raffic Hariri, in February 2005 have had a negative impact on tourism and investment that caused an economic slowdown. The central bank has nonetheless been able to maintain the pound:US dollar exchange rate and avoid government default, although at the cost of tapping heavily into its foreign exchange reserves. Thanks to a rebound of foreign currency deposits, however, the reserves have since recovered pre-crisis levels. Sovereign risk has remained very high due to the excessive level of public sector debt, half of
316
WEAKNESSES Public sector debt resulting from the country’s post-war reconstruction has reached difficultto-sustain levels. ● Political divisions have thus far prevented implementation of the reforms needed to consolidate government finances. ● The economy’s dependence on imported products has generated a severe foreign trade imbalance. ● Uncertainties linked to the regional environment have affected the country’s economic outlook and, thus, its capacity to attract FDI. ●
which has been denominated in foreign currency. That risk would become particularly unsustainable in case of devaluation. Although currently well capitalized, liquid and profitable, commercial banks have nonetheless been vulnerable due to their exposure to sovereign risk. An economic recovery will depend on the country’s capacity to overcome the cleavages between communities and restore consumer and investor confidence. Implementation of reforms to consolidate public sector finances will be a priority to allow the country to mobilize international aid.
LEBANON MAIN ECONOMIC INDICATORS US$ billions
2001
2002
2003
2004(e)
2005(f )
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2.0 -0.4 -18.9 0.9 6.8 -5.9 -3.6 -21.5 79.2 63.9
2.0 1.8 -15.1 1.0 6.0 -5.0 -2.4 -13.8 93.0 57.7
3.0 1.3 -14.6 1.4 6.7 -5.2 -2.4 -13.1 115.9 59.1
5.0 3.0 -11.8 1.8 8.9 -7.1 -4.3 -21.9 120.4 40.9
0.5 2.5 -10.0 1.8 8.8 -7.0 -4.5 -22.5 129.4 44.0
3.2 3.0 -11.2 1.9 9.3 -7.5 -5.2 -24.0 126.8 43.3
5.9
8.6
13.4
10.2
9.8
8.9
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview Against a background of political instability and financial disequilibrium, Lebanon is struggling to implement structural reforms, made all the more necessary by its increasing international exposure (ratification of the association agreement in December 2002, implementation of the Arab free trade agreement in January 2005, WTO accession due in 2006). The announcement last July of an ambitious economic and social reform programme by the first Lebanese government appointed after the departure of Syrian troops from the country has helped restore the confidence of the international community and foreign, especially Arab, investors. In the period between 1995 and 2004, Arab investment in Lebanon amounted to US$4.7 billion, making the country of the cedar the largest recipient of inter-Arab investment. Arab capital creates real market opportunities for both foreign suppliers and private Lebanese firms that contributed to the country’s economic boom in the 1990s, following the end of the civil war.
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■
Means of entry Despite continued instability and the narrowness of the domestic market, Lebanon, with its highly enterprising businesspeople, offers comparative advantages over its closest neighbours.
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●
A strategic location. At the centre of the eastern Mediterranean, Lebanon aims to be the meeting point of Europe, Asia and Africa. Because of its geographical and cultural proximity to the Arab markets of the Middle East, Lebanon offers access to almost 300 million consumers. A liberalized economy. Lebanon stands out from its neighbours by virtue of a highly developed and reliable banking system (comprising some 60 banks) competently managed by the Bank of Lebanon, full convertibility of the dollar-pegged local currency, a free currency market and the absence of restrictions on capital movements.
In 2000, the rates of customs duty were slashed to between 0 per cent and 70 per cent. There are few non-tariff barriers. Such restrictions as exist consist mainly of an import ban on some 326 products or product categories, import licences and permits for 261 other product categories, and technical inspections conducted on the basis of changing specifications. Health regulations, though still based on vague legal principles, are fairly liberal and comply with the recommendations of leading international organizations. All means of payment are accepted, although the irrevocable and confirmed letter of credit, denominated in euros or dollars, is the most widely used instrument. Late payment, especially in
4
317
THE MIDDLE EAST AND NORTH AFRICA connection with the short-term contracts, is fairly rare. In the event of default, companies usually avoid litigation due to the instability of the legal system and the insufficient transparency of procedures. The problem of bad debt is often sorted out amicably. For large contracts, the best way to deal with disputes is through international arbitration outside Lebanon. Since 2002, contracts signed with the government can also be referred to international arbitration. Attitude towards foreign investors Due to the rapid internationalization of its economy, Lebanon has over the years developed a modern legal system that protects the rights and assets of foreign investors and places few restrictions on them. In the absence of specific legislation, foreignheld companies are automatically subject to ordinary laws in matters of trade, labour relations and taxation. At 15 per cent, standard corporation tax is among the lowest in the world.
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318
Foreign companies are eligible for all the provisions of the country’s Investment Promotion Act adopted in August 2001 which, among other things, empowers the government one-stop shop, IDAL (Investment Development Authority in Lebanon), to handle and facilitate their administrative formalities. Under this act, for which enactment legislation was passed in early 2003, all local and foreign businesspersons investing in designated underprivileged areas or special sectors (tourism, manufacturing, agri-foods, agriculture, telecommunications and IT) are entitled, under certain conditions, to total or partial tax exemption according to the amount invested, the number of jobs created, the impact on the economy and the environment, and the type of technology transferred. France and Lebanon signed a reciprocal investment protection and promotion agreement in 1996 that came into force in 1999.
LEBANON OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 69 ■ Public consumption 9 ■ Investment 12
Exports: 13% of GDP
Imports: 39% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
150
1200
120
1000 800
90
600 60
400
30
200
0
0 Switzerland UAE
Saudi Arabia
USA
Turkey
France
Germany
Italy
Syria
China
4
IMPORTS by products ■ All food items 18% ■ Fuels 16% ■ Chemical products 12% ■ Other manufactured goods 27% ■ Capital goods and transport equipment 22% ■ Miscellaneous 6%
EXPORTS by products ■ All food items 15% ■ Ores and metals 7% ■ Chemical products 8% ■ Other manufactured goods 31% ■ Capital goods and transport equipment 13% ■ Miscellaneous 25%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
Lebanon 4,840 4,040 0.759 n/a 91 30.3 199 80.5
Regional average DC average 5,860 2,390 0.708 26 59 35 135 38
4,300 1,280 0.697 33 43 31 112 28.4
319
THE MIDDLE EAST AND NORTH AFRICA
Libya Population (million inhabitants) GDP (US$ million)
5.6 23,600
Short-term: C
Coface analysis
Medium-term: High risk
STRENGTHS ● Large oil and gas reserves represent potential for increasing production capacity limited by years of embargo. ● Needing to attract foreign investment, government authorities have demonstrated their commitment to reform. ● The financial situation has been comfortable with moderate foreign debt. ● The country has largely cleared old debts.
RISK ASSESSMENT The lifting of the embargo and continuing excellent oil market conditions have spurred growth since 2003. With barrel prices remaining high, economic activity should continue to trend up in 2006, buoyed by private consumption and public investment. The oil windfall should continue to generate comfortable fiscal and external surpluses. The country will need foreign investment to increase oil production capacity and diversify an economy overly exposed to an oil market downturn. Although its rehabilitation within the international
320
WEAKNESSES The unpredictability of economic policy and the lack of a suitable legal and financial framework have deterred investment. ● The economy has been dependent on the oil sector and vulnerable to external shocks. ● A bloated and inefficient civil service has stifled the emergence of a dynamic private sector. ● Very poor governance characterized by patronage, clientelism and corruption has undercut the country’s development. ● Years of ostracism have weakened the economy. ● The opacity of economic data makes it difficult to analyze risk. ●
community has restored investor confidences, structural reforms are still essential. The promising reform programme announced several years ago has produced few tangible results except elimination of taxes on imports and reduction of subsidies on fuel and electricity. The sudden application of the measure on subsidies spurred social tensions, heightened all the more by the freeze on public sector wages in force for several years now. The regime’s opacity and unpredictability remain the main elements of uncertainty that effective implementation of the announced reforms would contribute to easing.
LIBYA MAIN ECONOMIC INDICATORS US$ billions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2001
2002
2003
2004
2005(f )
2006(f )
4.5 -8.8 -1.2 11.0 4.8 6.2 3.7 12.9 19.1 6.6
3.3 -9.9 10.2 9.9 7.4 2.4 0.1 0.6 29.1 6.8
9.1 -2.1 10.6 14.7 7.2 7.5 3.6 15.4 23.7 4.7
9.3 -3.4 18.8 19.1 8.6 10.5 5.6 19.5 19.3 4.0
8.5 -1.0 30.0 28.7 10.8 17.9 12.3 33.8 15.3 3.0
8.1 1.8 28.8 30.2 13.2 17.0 10.6 26.0 13.8 3.2
20.7
16.4
18.0
20.4
21.0
21.2 f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview Law No 5 and its implementing decrees encourage foreign investment in the agricultural, services, industrial, healthcare and tourism sectors. The minimum capital investment is US$50 million, unless otherwise decided by the General Popular Committee. A huge investment programme is under way to improve transport infrastructure and equipment (air, land); develop telecommunications (extension of the land line network to 2.5 million lines and of the GSM network to 3 million subscribers); increase electricity production (extension of generating capacity from 4,500 MW to 10,000 MW by 2020); and oil and gas exploration and production (award of new licences with a view to increasing output to 3 million barrels daily by 2010); fund large-scale river development (giant water supply project); build desalination plants (installation of 11 new units; enhance the environment; modernize radio and television networks (equipment digitization and training); and expand the agri-foods industry. Libya therefore offers a host of new business opportunities, despite the widespread system of state controls, characterized by cumbersome, slow and inconsistent administrative practices.
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Means of entry Since early 2003, licences are no longer required to import goods into the country, but every shipment must be accompanied by a certificate of origin. Libya switched its customs tariff to the simplified harmonized nomenclature in January 1998. An import ban is in place on so-called ‘luxury’ and locally manufactured products, a list of which is available. Customs duties on imported goods were abolished on 1 August 2005 and replaced by a 4 per cent ‘port services’ tax to be paid by Libyan importers on all but 85 products. Importers are also liable to 2 per cent production tax and a consumption tax ranging from 25–50 per cent. Sales contracts are settled exclusively by irrevocable letter of credit, which can take six months or more to open. The law governing contracts with Libyan government agencies requires foreign suppliers to pay 2 per cent stamp duty on the total value of the contract (1 per cent for subcontracting agreements). The Libyan market should only be approached by financially solid companies used to long and arduous negotiations. Certain products (vehicles, motorcycles, office equipment, electrical appliances, electronic equipment, roadworks and quarry equipment, farm machinery) may not be sold without entering into a representation agreement with a Libyan agent responsible for after-sales service. SMEs can usefully engage in ordinary business not requiring funding. The Annual Tripoli
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321
THE MIDDLE EAST AND NORTH AFRICA International Trade Fair in April is an excellent showcase for business and making oneself known. Foreign exchange regulations The country’s foreign exchange regulations, far more flexible than in the past, are overseen by the
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Exchange Control Department, an arm of the central bank. Since 16 June 2003, the Libyan government has successfully maintained a free exchange rate on the currency market based ona single rate. The current exchange rate is LDY1.6:€1.
OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 43 ■ Public consumption 13 ■ Investment 10
Exports: 48% of GDP
Imports: 36% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
6000
2000
5000
1500
4000
1000
3000 2000
500
1000 0
0 Italy
Spain
Germany Turkey
France
Italy
Germany Tunisia
UK
France
IMPORTS by products ■ Industrial equipement 48% ■ Manufactured goods 21% ■ All food items 13% ■ Chemical products 5% ■ Other manufactured goods 7% ■ Miscellaneous 5%
EXPORTS by products ■ Hydrocarbons 97% ■ Miscellaneous 3%
STANDARD OF LIVING / PURCHASING POWER Indicators
322
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
Libya n/a 5,088 0.799 n/a 88 32.5 136 23.4
Regional average DC average 5,860 2,390 0.708 26 59 35 135 38
4,300 1,280 0.697 33 43 31 112 28.4
MOROCCO
Morocco Population (million inhabitants) GDP (US$ million)
30.1 43,727
Short-term: A4
Coface analysis
Medium-term: Quite low risk
STRENGTHS ● Endowed with important assets (natural resources, tourism, population), the country has pursued structural reform policy viewed with interest by investors. ● Morocco’s political, economic and financial ties to the EU have contributed to its economic dynamism. ● With the country’s limited financing needs and modest foreign debt, the external constraint has been moderate. ● With its political stability and progress toward democracy, the country has earned international community support.
RISK ASSESSMENT Economic activity slowed markedly in 2005 with poor weather conditions affecting farm production. Moreover, the end of the multifibre arrangement in January 2005 has caused difficulties for the textile sector and slowed the growth of manufacturing. The Coface payment incident index has nonetheless remained near the world average, despite the weakness of some companies, particularly in the clothing sector. Forecasts project 5.3 per cent growth for 2006 subject to good weather conditions, a satisfactory tourist season and an increase in foreign investment. Although that growth rate will not be enough to significantly reduce poverty and unemployment, efforts on investment and the pursuit of structural reforms have improved the longer-term outlook.
WEAKNESSES The Moroccan economy still depends heavily on agriculture (20 per cent of GDP, 40 per cent of jobs) and, thus, on weather conditions. ● Demographic trends, unemployment (particularly among young people) and poverty have spurred social unrest and could cause political tensions. ● The strained situation of public finances has complicated matters for government authorities in responding to such challenges. ● The unresolved West Sahara problem continues to affect relations with Algeria and many African countries. ●
4
The economic slowdown has affected public sector finances, which deteriorated in 2005 and for which the prospects for improvement have been uncertain. Essential investment spending has been compounding the already heavy burden of current expenses. Deficit reduction has thus proven difficult and has generated high public domestic debt. External financing needs have nonetheless remained moderate thanks to pursuit of the foreign debt reduction policy. Political risk has been stable with the social situation (poverty, unemployment, corruption) constituting the main source of uncertainty. Meanwhile, the unresolved West Sahara question has continued to sour Morocco’s relations with Algeria and some African countries.
323
THE MIDDLE EAST AND NORTH AFRICA MAIN ECONOMIC INDICATORS US$ billions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
6.3 0.6 -11.1 7.1 10.2 -3.0 4.7 48 16.0
3.2 2.8 -4.5 7.8 10.9 -3.1 4.1 51 20.9
5.5 1.2 -5.3 8.8 13.1 -4.3 3.6 43 19.8
3.7 1.5 -4.9 9.7 16.2 -6.5 1.9 39 15.2
1.2 2.0 -5.9 9.9 18.1 -8.3 -0.1 35 12.8
5.3 2.3 -3.9 10.6 19.3 -8.6 0.1 33 11.9
7.6
8.4
9.7
9.5
8.3
8.7
e = estimate, f = forecast
Means of entry The association agreement between Morocco and the EU calls for the gradual introduction of a free trade area by 2012. Under the agreement, steps have been taken to dismantle customs duties on industrial products. Import duties for half the tariff lines on industrial products are zero. For industrial goods deemed sensitive because they are manufactured in Morocco, tariffs will be gradually eliminated by 2012. Customs duties on farm products and foodstuffs are high (65 per cent on average), with tariff peaks of up to 376 per cent. The association agreement defines preferential tariff quotas for some farm products. The last few years have seen wide-ranging reforms aimed at stabilizing the business environment. Numerous laws complying with international business standards have been passed. Key measures include the new Trade Act 1996; the establishment in 1997 of commercial courts; the modernization of company law in 1997 and 2001; the introduction of new government procurement legislation in 1998; the establishment of a new Customs Code in 2000; the Competition and Price Act; the Intellectual and Industrial Property Protection Act, in force since end-2004; and the Literary and Artistic Property Act, in force since 1 January 2001. The Insurance Act 2002 has been in force since October 2004. A new labour code was adopted in June 2004.
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324
Attitude towards foreign investors The regulations governing foreign investment are set out in the Investment Charter. The charter proposes measures to reduce investment costs and confirms the principle of the free transfer of foreign investment capital as well as any income or profits derived from it. The setting up of regional investment centres (CRIs), overseen by walis (prefects), has significantly simplified start-up procedures by offering investors a one-stop shop. As a result, start-up formalities now only take around ten days.
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Foreign exchange regulations Exchange controls remain in place. The exchange rate is set by the central bank, Bank Al Maghrib, on the basis of a basket of currencies. A currency convertibility system set up in 1992 encourages hard currency investment in Morocco by guaranteeing repatriation of capital and income.
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PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 350 300
WORLD Morocco
250 200 150 100 50 0
Ju ne 9 D 3 ec Ju 93 ne 9 D 4 ec Ju 94 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 97 D ec Ju 97 ne 9 D 8 ec -9 Ju 8 ne 99 D ec Ju 99 ne 0 D 0 ec -0 Ju 0 ne 0 D 1 ec Ju 01 ne 02 D ec Ju 02 ne 0 D 3 ec Ju 03 ne 0 D 4 ec Ju 04 ne 0 D 5 ec -0 5
CONDITIONS OF ACCESS TO THE MARKET
MOROCCO OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 43 ■ Public consumption 15 ■ Investment 18
Exports: 32% of GDP
Imports: 36% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
3000
3000
2500
2500
2000
2000
1500
1500
1000
1000
500
500
0
0 France
Spain
UK
Germany
4
Italy
France
Spain
Italy
Russia
USA
IMPORTS by products ■ All food items 14% ■ Fuels 16% ■ Chemical products 10% ■ Other manufactured products 29% ■ Capital goods and transport equipment 26% ■ Miscellaneous 6%
EXPORTS by products ■ All food items 21% ■ Ores and metals 8% ■ Chemical products 11% ■ Other manufactured products 41% ■ Capital goods and transport equipment 13% ■ Miscellaneous 6%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
Morocco 3,940 1,310 0.631 30.9 57 32.9 40 19.9
Regional average DC average 5,860 2,390 0.708 26 59 35 135 38
4,300 1,280 0.697 33 43 31 112 28.4
325
THE MIDDLE EAST AND NORTH AFRICA
Oman Population (million inhabitants) GDP (US$ million)
2.6 21,700
Short-term: A3
Coface analysis
Medium-term: Quite low risk
STRENGTHS ● The economy is diversified (gas, petrochemicals, aluminium, tourism) and has been open to domestic and foreign private investment. ● The country boasts natural wealth (gas and oil) with nonetheless limited reserves. ● Oman has financial holdings abroad managed by a reserve fund for future generations.
RISK ASSESSMENT With crude production continuing to decline in 2005, several factors buoyed economic activity including non-oil sector dynamism spurred by soaring barrel prices, private consumption and investments focused mainly on gas-industry and tourism-sector development. In 2006, start-up of a third tranche of liquid gas production and a slight recovery of oil production should foster a growth upturn. High oil prices should continue to generate large external and fiscal surpluses despite the growth of
326
WEAKNESSES Diversification notwithstanding, the economy has remained dependent on oil income and vulnerable to a drop in barrel prices and the decline of its crude production capacity. ● Oil production costs have been high due to the maturity of the fields. ● Spending rigidities (wages, defence and subsidies) have affected public sector finances. ● The country has been dependent on foreign labour whose remittances have weakened the invisibles balance while domestic unemployment has been one of the highest among GCC countries. ●
imports and public spending. Although the investments have caused an increase in foreign debt, debt service has remained low in relation to foreign currency earnings. Debt ratio trends will nonetheless bear watching should oil prices decline. The economy – still very dependent on oil income while reserves are depleting – will need foreign investment to continue diversifying. Politically, although the ties maintained with the United States and UK have tended to spur social tensions, they should not jeopardize the political stability of the Sultan, who enjoys broad popular support.
OMAN MAIN ECONOMIC INDICATORS US$ billions
2001
2002
2003
2004
2005(f )
2006(f )
Economic growth (%) Inflation (%) Public balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
7.5 -1.0 3.4 11.1 5.3 5.8 2.0 10.0 27.1 14.3
2.3 -0.7 3.1 11.2 5.6 5.5 1.8 8.7 22.3 11.3
1.9 -0.4 1.5 11.7 6.1 5.6 0.9 4.1 19.4 10.4
3.8 0.4 4.8 13.3 7.9 5.5 0.4 1.7 21.4 9.2
4.6 2.1 11.9 17.8 9.1 8.7 3.1 9.9 22.2 7.0
6.9 1.7 9.4 19.4 10.4 9.0 2.9 8.4 25.0 6.3
2.9
3.8
3.7
3.1
3.3
3.3 f = forecast
CONDITIONS OF ACCESS TO THE MARKET ■ Market overview The Omani economy remains highly dependent on the oil sector. In the face of this situation, the government continues to pursue the objectives of its sixth five-year plan. The focus of this plan is on industrially led economic diversification – in particular the development of natural gas as both a source of energy and a raw material for large-scale industrial projects (such as the Sohar port development) – and on the promotion of the private sector’s role in the economy through privatization of state-owned companies and utilities. The last plank of government policy – the Omaniization of jobs – has enabled the sultanate to post the highest employment to national population ratio among Gulf countries in the last ten years. ■ Means of entry For private contracts, exporters of consumer goods not demanding after-sales service can dispense with a local agent. For public tenders open to foreign companies, exporters must have a local office or be represented by an Omani company. Standard customs duty for the majority of products is 5 per cent of the CIF value. However, a prior licence is mandatory for some products on grounds of health,
religion or protection of local manufacture. There are no exchange controls and foreign currency is freely sold; nor are there any restrictions on the transfer of company profits or capital.
4
■ Attitude towards foreign investors Omani legislation tends to encourage foreign investment but has kept in place a number of restrictions in order to channel foreign money into industrial and infrastructure projects, especially those linked to the country’s privatization programme. As a result, foreigners can now acquire a stake in manufacturing, trading and service companies whereas, in the past, they were rarely allowed a shareholding in the last two. Foreign companies that wish to open a representative office in the sultanate are not required to have a local sponsor, provided they have been registered for ten consecutive years in the statutory trade register of the country where their head office is based. The additional condition requiring the parent company to have three subsidiaries in three foreign countries was abolished in 2005. Tax incentive schemes have also been introduced to reduce discrimination against foreign companies and encourage local companies to open their capital to foreigners.
327
THE MIDDLE EAST AND NORTH AFRICA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 32 ■ Public consumption 17 ■ Investment 10
Exports: 57% of GDP
Imports: 35% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
2000
1500 1200
1500
900 1000 600 500
300
0
0 South Korea
China
Japan Thailand
UAE
UAE
Japan
USA
UK
India
IMPORTS by products ■ All food items 17% ■ Ores and metals 5% ■ Chemical products 7% ■ Other manufactured products 20% ■ Capital goods and transport equipment 44% ■ Miscellaneous 7%
EXPORTS by products ■ All food items 5% ■ Fuels 77% ■ Other manufactured products 5% ■ Capital goods and transport equipment 9% ■ Miscellaneous 3%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
328
Oman 13,000 7,830 0.781 n/a 78 41.3 84 35
Regional average 5,860 2,390 0.708 26 59 35 135 38
DC average 4,300 1,280 0.697 33 43 31 112 28.4
PALESTINIAN TERRITORIES
Palestinian Territories Population (million inhabitants) GDP (US$ million) GDP per capita
3.4 3,454 927
Coface analysis RISK ASSESSMENT Five years after the start of the Intifada and subsequent collapse of the barely emerging economy, GDP per capita is still 30 per cent below its 1999 level. Although the Territories emerged from recession in 2003, several factors continued to hamper economic activity including restrictions of movement and the loss of jobs in Israel. In that climate of uncertainty, international aid declined. In 2005, the economy posted a better performance buoyed by improvement in the security situation and more accommodating fiscal policy. Furthermore, exports to Israel increased as did remittances. Grants also recovered. Although that brighter economic trend led to job creation, unemployment remained high with over 40 per cent of the population still living below the poverty line. The fiscal situation stayed tight. Despite
improved collection, revenues have struggled to cover a growing payroll with international aid not meeting expectations. 2006 prospects are very uncertain after the Hamas election victory. The financial and security constraints applied by Israel and the potential drying up of international aid could entail the collapse of an economy already surviving on a dripfeed. However, given the geopolitical stakes, the Palestinian Authority should be able to continue to obtain grants from various sources. For the time being, the resumption of the peace process appears compromised. Nevertheless, it is possible that, in the longer term, pragmatism may win out. Reconstructing the economy and infrastructure crucially depends on normalization of relations with Israel and implementation of structural reforms.
4
MAIN ECONOMIC INDICATORS US$ billions
2000
2001
2002
2003
2004
Economic growth (%) Inflation (%) Public sector balance (%GDP) Unemployment rate (%) Exports Imports Trade balance Current account balance (%GDP)
-5.6 2.7 6.6 14 3.4 0.9 -2.5 -25.2
-14.8 1.2 -25.4 26 3.2 0.5 -2.7 -23.4
-10.1 5.7 -24.4 31 2.8 0.4 -2.4 -5.6
6.1 4.4 -15.0 26 3.0 0.5 -2.5 n/a
6.2 3.0 -14.0 27 n/a n/a n/a n/a
2005(e) 8.7 3.0 -17.0 22 n/a n/a n/a n/a
329 e = estimate
THE MIDDLE EAST AND NORTH AFRICA
Qatar Population (inhabitants) GDP (US$ million)
810,000 28,500
Short-term: A2
Coface analysis
Medium-term: Low risk
STRENGTHS ● Vast gas resources, with reserves ranking third in the world, offer substantial development potential to Qatar, which could become the world-leading producer. ● Per capita income has been among the world’s highest. ● Diversification toward high energy-use export industries (steel and petrochemicals) has continued. ● The emirate enjoys the support of the United States. RISK ASSESSMENT The Qatar success story continues. Having devoted massive investments to developing its gas fields in the 1990s, the country has been reaping the benefits as evidenced by the improved living standards of its inhabitants. Engaged in an economic liberalization and democratization process, the country has benefited from political stability and an environment conducive to investments despite regional geopolitical uncertainties. After two years of double-digit growth resulting from a substantial increase in gas production and derivative industrial capacity, the economic and financial outlook has remained good
for 2006. While the oil sector should post a more moderate growth rate, economic activity outside the hydrocarbon sector should remain dynamic. High raw material prices and expansionary fiscal policy will continue to buoy consumption and investment. Higher interest rates should ease inflationary pressures. Despite increased spending, public sector accounts should continue to show surpluses thanks to the steadiness of oil revenues. The country should also succeed in consolidating its external financial situation, with large surpluses allowing it to meet its financing needs and accumulate foreign currency reserves and financial holdings.
CONDITIONS OF ACCESS TO THE MARKET
European origin (due to the BSE outbreak) and, more recently, live birds (avian flu). There is also free movement of goods between the six countries of the CCASG since the introduction of a customs union in January 2003. Imports, nevertheless, are
Market overview The Qatari market is free and open to trade, except for imports of live cattle and bovine products of
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330
WEAKNESSES Gas and industrial project financing has generated heavy foreign debt nonetheless constituting a moderate constraint in relation to the country’s substantial foreign currency earnings and with the financing, moreover, secured by long-term export contracts. ● Fiscal revenues have remained very dependent on oil and gas market conditions. ● Available economic data has not been very transparent. ●
QATAR MAIN ECONOMIC INDICATORS US$ billions
2001
2002
2003
2004
2005(f )
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS&T exports) Foreign exchange reserves (in months of imports)
4.5 1.5 3.4 11.4 4.6 6.8 3.5 20.5 86.9 18.0
7.3 0.2 7.6 11.4 4.7 6.7 3.4 17.2 75.6 23.2
7.4 2.3 4.1 13.5 5.5 8.0 5.5 23.3 58.1 23.4
11.4 6.8 7.5 18.6 6.2 12.4 8.6 30.2 52.7 9.5
12.0 4.5 8.6 26.7 7.3 19.4 14.7 36.2 42.5 8.2
7.2 3.0 5.6 27.7 8.4 19.4 13.6 30.8 40.6 8.5
1.7
2.0
3.4
3.2
3.6
3.8 f = forecast
subject to rules of origin that vary from country to country. Local sponsorship is required to distribute and market imported goods, except in the case of public tenders. Trademark and intellectual property protection legislation is relatively recent. Qatar has been a signatory to the Geneva Convention (industrial property) and the Bern Convention (intellectual property) only since 5 July 2000. Consequently, the country still lacks essential manpower to enforce and implement this legislation on a systematic basis. Means of entry Since 1 January 2003, all goods are liable to 5 per cent ad valorem duty under the CCASG customs union, except products directly competing with local manufacture (steel: 20 per cent), products taxed on grounds of health (cigarettes: 100 per cent) or those banned by Islam (wines and spirits: 100 per cent). Exporters should opt for the irrevocable and confirmed letter of credit in transactions with local customers, as it is the most widely used means of payment in Qatar. Public procurement contracts are paid for in cash.
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Attitude towards foreign investors Regulations governing foreign investment were relaxed under a new law passed on 16 October 2000. Foreign investors are now permitted to own 100 per cent of a company in the agricultural,
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manufacturing, healthcare, education, tourism and energy sectors, subject to the approval of the Ministry of Economic Affairs and Trade and, in the case of industrial projects, that of the Ministry of Energy and Industry. The only precondition is that the investment comply with the government’s development plans. Sectors falling outside the scope of this legislation include banking, insurance, property and retail. Foreigners investing in these sectors are required to have a majority Qatari partner who owns at least 51 per cent of the scheme. The Qatar Financial Center – a financial free zone set up on 1 May 2005 along the lines of the Bahrain and Dubai free zones – accepts foreign banks and financial services firms without a local partner. Similarly, foreign research and development laboratories can operate out of Doha’s Science and Technology Park under the free zone status awarded to it in September 2005. Foreign investors can acquire leaseholds for a maximum period of 50 years on a renewable basis, but are barred from acquiring freehold property except in the building complex under construction on the artificial island known as Pearl Island. Disputes between a foreign investor and a local party are subject to local or international arbitration. Foreigners are required to have a Qatari sponsor when applying for a residence permit tied to a work permit. Foreign access to the Doha Stock Exchange, principally via mutual funds, has been opened up
4
331
THE MIDDLE EAST AND NORTH AFRICA following the government’s announcement in May 2004 to allow foreigners to own up to 25 per cent of listed companies. The Ministry of Economic Affairs and Trade grants wholly foreign-funded projects ten-
year tax relief, together with exemption from customs duties for imported equipment, raw materials and semi-finished goods not available locally.
OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 13 ■ Public consumption 17 ■ Investment 14
Exports: 71% of GDP
Imports: 26% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
600
8000 7000 6000 5000 4000 3000 2000 1000 0
500 400 300 200 100 0 Japan
South Korea
Singapore Thailand
UAE
USA
Japan
Germany
UK
Italy
IMPORTS by products ■ All food items 12% ■ Chemical products 7% ■ Other manufactured goods 30% ■ Capital goods and transport equipment 47% ■ Miscellaneous 5%
EXPORTS by products ■ Fuels 87% ■ Chemical products 6% ■ Other manufactured products 5% ■ Miscellaneous 2%
STANDARD OF LIVING / PURCHASING POWER
332
Indicators
Qatar
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
n/a 35,123 0.849 n/a 93 26.9 275 169
Regional average DC average 5,860 2,390 0.708 26 59 35 135 38
4,300 1,280 0.697 33 43 31 112 28.4
SAUDI ARABIA
Saudi Arabia Population (million inhabitants) GDP (US$ million)
22.5 250,900
Short-term: A4
Coface analysis
Medium-term: Quite low risk
STRENGTHS ● OPEC’s leading oil-producing country with a quarter of world oil reserves, Saudi Arabia holds a strategic position in oil markets. ● Development of the gas industry will enhance growth prospects. ● The country has little foreign debt. ● Admission to the WTO will foster continued effort on structural reform, particularly the opening of the economy to foreign investors. ● The country continues to enjoy a privileged relationship with the United States in the region. ● The succession to King Fahd proceeded smoothly with continuity preserved.
RISK ASSESSMENT Oil export revenues have been benefiting the entire economy, which should continue to post respectable growth rates with the prospect of very high oil prices. Abundant liquidity, in conjunction with the gradual opening up of state-owned companies, has been buoying stock markets. In that context, company payment behaviour has been satisfactory on the whole. The country has, moreover, been registering substantial external and fiscal surpluses that have allowed it to build up foreign assets and reduce public sector domestic debt.
WEAKNESSES Very dependent on oil revenues, the economy has been vulnerable to external shocks. ● Conservatism has been impeding political and economic liberalization. ● High demographic growth and an ineffective education system have been contributing to a high unemployment rate that puts pressure on the social climate. ● Spending rigidities (subsidies and wages) have been straining public finances. ●
4
However, there are still weaknesses on both the economic and political levels. The economy has been vulnerable to a still-possible downturn in oil market conditions. Job creation continues to be a major challenge. Continuing the effort on reforms, which King Abdallah has been promoting, will thus be essential. Although the regional instability and terrorist threats have not appeared to affect the economy thus far, they nonetheless constitute a factor aggravating risks. They tend to affect the reform programme and foreign investment and could ultimately destabilize the regime.
333
THE MIDDLE EAST AND NORTH AFRICA MAIN ECONOMIC INDICATORS US$ billions
2001
2002
2003
2004
2005(f )
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
0.5 -0.8 -3.9 68.0 28.6 39.4 9.4 5.1 19.4 8.4
0.1 0.2 -2.9 72.5 29.6 42.8 11.9 6.3 16.2 7.2
7.7 0.6 4.5 95.2 33.9 61.4 29.7 13.8 14.9 5.6
5.2 0.3 10.5 128.4 39.7 88.7 52.6 21.0 13.4 4.4
6.0 0.6 18.7 185.3 47.0 138.4 101.5 33.0 11.6 3.2
5.0 0.6 13.5 193.2 50.7 142.5 103.0 31.7 11.4 3.3
3.2
3.6
3.7
3.9
3.4
3.4 f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview Saudi households spend the bulk of their income on non-durable goods. Consumer demand for such goods is strong, fuelled by years of abundant cash. With 23 million inhabitants and per capita GDP of around US$14,000 at end-2005, the Kingdom is one of the main markets of the Middle East. However, the Saudization of jobs (+5 per cent a year is the official target) remains a problem as local manpower is inadequately trained to meet the needs of business. Rising unemployment (estimated at 20 per cent among men) has a destabilizing effect on the 200,000 young Saudis who arrive on the job market each year. Spending on education and vocational training is therefore a government priority in every budget.
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Means of entry Although member states of the Gulf Cooperation Council (Saudi Arabia, Bahrain, United Arab Emirates, Kuwait, Oman and Qatar) introduced a customs union on 1 January 2003, Saudi Arabia continues to apply differential duties on hundreds of products over a transition period that is due to expire in 2006. Actual customs duty ranges from 0 per cent (basic foodstuffs and staple commodities), 5 per cent (80 per cent of imported goods), 12 or 20 per cent (some locally produced goods) and 25 per
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334
cent (various fruit and vegetables), to 100 per cent (milk, wheat, cigarettes and dates). Import bans are in place on mostly religious grounds. WTO accession in December 2005 should, in coming years, lead to a marked reduction in differential duties and a review of certain nontariff barriers to trade, such as the national preference principle for public tenders. Despite the announcement of measures to relax visa formalities, entry and residence requirements for foreigners are very strict (compulsory Saudi sponsor). The legal environment is fairly unstable and intellectual property protection inadequate. In general, government agencies are slow to pay (7–30 months), but defaults remain rare. Attitude towards foreign investors A new Investment Code was adopted in April 2000. Its key features include: issue of licences within 30 days, establishment of a one-stop shop for processing applications (SAGIA), freehold ownership of staff facilities and accommodation, self-sponsorship for foreign companies and access to concessional Saudi financing. However, because of the monopoly banning foreigners from directly holding shares in the country, foreign companies can only operate through Saudi law subsidiaries incorporated as private limited liability companies or branches. A negative list of sectors from which foreign investors are barred was drawn up in
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SAUDI ARABIA February 2001 and cut in February 2003 and in 2005. The marginal rate of corporation tax for foreign companies has been cut to 20 per cent. Losses can now be carried forward over a limited number of years. A reciprocal investment protection
and promotion agreement with France was concluded in June 2002 and came into force in March 2004. There is also a double taxation agreement between the two countries renewable every five years (next renewal date: 2008).
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Saudi Arabia
250
200
150
100
50
ec -9 4 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 9 D 7 ec Ju 97 ne 9 D 8 ec -9 Ju 8 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 0 D 1 ec -0 Ju 1 ne 0 D 2 ec Ju 02 ne 0 D 3 ec Ju 03 ne 0 D 4 ec -0 Ju 4 ne 0 D 5 ec -0 5 Ju
3 94 ne
Ju
D
-9
ec D
Ju
ne
93
0
4
335
THE MIDDLE EAST AND NORTH AFRICA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 27 ■ Public consumption 20 ■ Investment 15
Exports: 47% of GDP
Imports: 24% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
20000
6000 5000
15000
4000
10000
3000 2000
5000
1000
0
0 USA
Japan
South Korea
China
Taiwan
USA
Japan
Germany
UK
China
IMPORTS by products ■ All food items 16% ■ Chemical products 10% ■ Other manufactured products 25% ■ Capital goods and transport equipment 43% ■ Miscellaneous 6%
EXPORTS by products ■ Fuels 86% ■ Chemical products 8% ■ Miscellaneous 6%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
336
Saudi Arabia 13,230 10,777 0.772 n/a 88 40.2 155 130.2
Regional average DC average 5,860 2,390 0.708 26 59 35 135 38
4,300 1,280 0.697 33 43 31 112 28.4
SYRIA
Syria Population (million inhabitants) GDP (US$ million)
17.8 21,499
Short-term: C
Coface analysis
Medium-term: Very high risk
STRENGTHS ● Syria has engaged in a process of liberalising its economy to attract investors, revitalise growth, and create jobs, but progress has been slow. ● The tourism sector continues to offer substantial development potential. ● The regularization of payment arrears and cancellation of debt granted by Russia have considerably reduced foreign debt. ● The value of the country’s holdings abroad has represented two years of imports.
RISK ASSESSMENT Since the Iraqi regime fell in 2003, the economy has been running at slow speed and struggling to get started again, with the decline of oil production impeding recovery. The non-oil sector has remained the economy’s only growth engine, buoyed in 2004 by a foreign investment rebound and tourism. The country’s situation as a rear base for Iraq has spurred consumption. However, the escalation of regional tensions and increasing international pressure after the assassination early2005 of the incumbent Lebanese prime minister, have affected consumer and investor confidence. In that context, and considering the risks of isolation on the international scene, a robust economic recovery will be unlikely to develop in 2006.
WEAKNESSES An inefficient banking system, relatively unprofitable state-owned companies, administrative red tape and poor governance have impeded the emergence of a dynamic private sector and affected public sector finances. ● With the decline of oil production jeopardizing the country’s economic and financial situation, an acceleration of the reform process will be necessary to foster private investment. ● The sanctions imposed by the United States, political uncertainties and escalating regional tensions have been affecting the business environment. ●
4
The external financial situation has improved thanks to debt restructuring agreements concluded with creditor countries, notably Russia, which granted a substantial cancellation. Soaring barrel prices have thus far allowed the country to avoid excessive deterioration of its external accounts despite the decline of oil export volumes. It has thus become urgent to speed up reform implementation to energize the private sector and consolidate public sector accounts, which have been generating increasing domestic debt. Despite repeated commitments made by government authorities, the need to calm political turmoil could steal the priority from the reform process.
337
THE MIDDLE EAST AND NORTH AFRICA MAIN ECONOMIC INDICATORS US$ billions
2001
2002
2003
2004(e)
2005(f )
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
3.6 5.6 2.4 5.3 5.0 0.3 1.2 6.1 107.8 35.2
4.1 -2.3 -1.6 6.6 5.2 1.3 1.8 8.9 103.7 29.5
1.3 5.9 -2.7 5.8 5.4 0.4 1.3 6.0 100.8 33.9
1.7 4.6 -5.3 5.4 6.4 -1.0 0.5 1.9 94.4 34.1
1.5 6.7 -4.8 5.7 7.1 -1.5 0.0 0.2 42.2 8.7
2.0 5.0 -5.9 5.4 7.2 -1.9 -0.3 -1.1 39.8 7.9
5.9
6.8
7.4
6.9
6.2
6.0
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Means of entry Syria is engaged in a deliberate policy of customs reform and gradual liberalization of its foreign trade. A signatory to GAFTA (Greater Arab Free Trade Area), it has full and free access to the Arab market – from 1 January 2005 – as well as free trade agreements with Iraq and Turkey. Moreover, Syria and the EU initialled an association agreement on 19 October 2004. As soon as this agreement comes into force customs duties will be gradually phased out and import bans lifted over a 12-year period. There are ten rates of customs duty ranging from 1 per cent for agricultural and industrial commodities to 150 per cent for cars (down from 300 per cent a few years ago). An important decree, designed to reform the customs nomenclature, was published on 1 September 2004. It contains steep tariff cuts for agrifood inputs, some chemicals and textiles. It also unifies the various levies (war levy, port charges) in the customs tariff. As part of its customs reform policy, the Syrian government issued a series of decrees in December 2002 designed to facilitate customs clearance, free up certain imports and classify prohibited products into eight customs categories. Syria follows the EU’s tariff nomenclature. The means of payment normally used in transactions between foreign suppliers and Syrian buyers from both the public and private sectors is the letter of credit. Most private Syrian importers have
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338
funds with foreign banks and, since measures to ease exchange controls came into effect in October 2005, with Syrian banks. The arrival of private banks on the Syrian market in January 2004 has radically altered practices, with more and more transactions taking place in Syria. Export credit agencies are gradually resuming their mid-term guarantees for Syria. Attitude towards foreign investors In 1991, Syria introduced a series of tax and legal measures, collectively known as Act No 10, to encourage investment, regardless of the origin of funds or the nationality of investors. Several measures were subsequently passed to make this act more flexible. One is the decree dated June 2000 authorizing the transfer of principal after five years of business and extending the tax-exempt period, although only companies earning foreign exchange may transfer their profits. Another is the 2001 amendment to Law No 10 offering private investors greater incentives and encouraging long-term projects. This amendment also grants investors property ownership rights in connection with their business. A specific tourism investment law offers numerous tax incentives and authorizes property ownership. There are also seven free zones in Syria – as well as one run jointly by Syria and Jordan – providing highly attractive tax breaks. The main restrictions relate to trade with Israel or Israeli-held companies under Arab boycott legislation.
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SYRIA Foreign exchange regulations The Syrian pound’s exchange rate is pegged to the US dollar. There are three rates in force, the most widespread being the floating rate set by the Commercial Bank of Syria. The Syrian pound is a
■
non-convertible currency. Since the opening of private banks, foreign currency accounts are authorized, but transfers are limited to foreign currency brought into the country from abroad.
OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 44 ■ Public consumption 8 ■ Investment 18
Exports: 40% of GDP
Imports: 33% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS
4
Mn USD
1500
600
1200
500 400
900
300 600
200
300
100
0
0 Germany
Italy
UAE
Lebanon
Turkey
Germany
Italy
China
France
Turkey
IMPORTS by products ■ Capital goods and transport equipment 25% ■ All food items 16% ■ Other manufactured products 26% ■ Chemical products 13% ■ Miscellaneous 20%
EXPORTS by products ■ All food items 13% ■ Fuel 72% ■ Manufactured goods 7% ■ Miscellaneous 7%
STANDARD OF LIVING / PURCHASING POWER Indicators
Syria
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
3,430 1,160 0.721 n/a 53 38.2 123 19.4
Regional average DC average 5,860 2,390 0.708 26 59 35 135 38
4,300 1,280 0.697 33 43 31 112 28.4
339
THE MIDDLE EAST AND NORTH AFRICA
Tunisia Population (million inhabitants) GDP (US$ million)
9.9 25,037
Short-term: A4
Coface analysis
Medium-term: Quite low risk
STRENGTHS ● Implementation of economic reforms has attracted foreign investors. ● EU and international community backing has facilitated the pursuit of reform policy. ● The country’s solvency has ensured its access to international capital markets. ● The economy’s increasing diversification has improved its capacity to withstand shocks. ● A developed social system and ambitious education policy are intended to attenuate the social cost of adjusting to change and further modernize the country.
RISK ASSESSMENT In 2005, a good year for farming and tourism offset difficulties in an industrial sector affected by higher energy prices and stiffer competition in world textile markets. However, the weakness of some sectors and the economic slowdown have not affected company solvency overall with the Coface payment incident index remaining near the world average. The outlook for 2006 has appeared brighter. An expected export recovery, tourism, and the steadiness of the telecommunications, mechanical engineering and electrical sectors should drive the growth.
340
WEAKNESSES Exogenous factors like European demand, weather conditions and tourist sensitivity to insecurity have had a strong influence on the growth rate. ● Social constraints linked to unemployment, particularly of youth, have remained severe. ● Greater effort on investment and company modernization will be necessary to improve Tunisian product competitiveness, notably in the textile sector. ● With the banking system remaining shaky, companies have inadequate access to credit. ●
Consolidating public sector finances continues to be a difficult task. Increased subsidies to soften the impact of oil price increases on the people have compounded the effects of structural rigidities (the heavy cost of the civil service and debt repayment, the decline of customs revenues in the framework of agreements with the EU). External financing needs, meanwhile, have remained moderate thanks to tourism revenues and expatriate remittances. FDI inflows, which should increase in 2006 considering the announced privatizations, and debt (although now at unsustainable levels), have been covering those needs.
TUNISIA MAIN ECONOMIC INDICATORS US$ billions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
2001
2002
2003
2004
2005(e)
2006(f )
4.9 2.0 3.5 6.6 9.0 -2.4 -4.2 54.4 12.6
1.7 2.7 -3.1 6.9 9.0 -2.1 -3.2 61.3 13.4
5.6 2.7 -3.2 8.0 10.3 -2.3 -2.9 62.1 12.9
6.0 3.6 -2.6 9.7 12.1 -2.4 -2.0 59.7 13.7
4.8 2.0 -3.4 10.2 12.6 -2.4 -1.4 58.1 13.5
5.4 2.7 -3.2 11.2 13.8 -2.6 -1.4 58.3 13.0
2.1
2.4
2.7
3.0
3.2
3.2
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Means of entry The conclusion of an association agreement between Tunisia and the EU in 1995 has led Tunisia to widen its market to EU manufactured goods and lower customs tariffs at different speeds for different product categories. For example, there are no duties on goods which do not have a locally produced substitute but are required to manufacture the finished product. In 2006, a rate of 22 per cent (33 per cent in 2005) will be applied to finished goods having a locally manufactured substitute, the import of which could destabilize the domestic market. By 2008, rates should be lowered to 0 per cent, except for farm products excluded from the agreement (effective rates for foodstuffs remain above 100 per cent). However, as far as companies are concerned the absence of a publicly available reference document makes each import duty untransparent. Moreover, Tunisian customs sometimes reclassify products, at their discretion, into a different tariff category. Despite some improvement, customs clearance still takes too long by international standards. Products such as foodstuffs and consumer goods, even where they comply with European standards, are not immune from comprehensive, but perfectly justified, local inspections mainly on grounds of public health. Authorization must be obtained from
■
the Ministry of Trade or the competent ministry to import products considered sensitive on grounds of safety, public order, health, hygiene and morality, or essential for the protection of wildlife, plants and cultural heritage. Fund transfers in settlement of ordinary transactions are unrestricted and handled by approved financial institutions (banks) without the need for central bank permission. Disputes over contracts entered into with Tunisian companies are usually heard by Tunisian courts. Attitude towards foreign investors Under the Investment Incentive Code (CII) of December 1993, foreigners are free to invest in all sectors, except mining, energy, local retail and financial services – all of which are governed by specific regulations. On the other hand, foreigners must obtain permission from the Higher Investment Commission to acquire marketable securities with attached voting rights, or shares in existing Tunisian companies where the overall foreign interest exceeds 49 per cent. They may not invest in sectors that are a state monopoly (water supply, post office, tobacco), without being awarded a concession. Prior authorization must be obtained for some partially export-related service activities in which the foreign interest exceeds 50 per cent. For ‘totally export-orientated’ investment (ie where over 70 per cent of production is exported),
4
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341
THE MIDDLE EAST AND NORTH AFRICA there are generous tax breaks. Foreigners are barred from owning farmland, but can acquire long leaseholds. A number of sectors face only limited administrative formalities, as do offshore banks and totally export-orientated firms. Although the
country has an open attitude to foreign investment, companies should give their undivided attention to the management of risks relating to wider issues of governance (legal stability, legal certainty, clarity of administrative procedures).
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 500 450
WORLD Tunisia
400 350 300 250 200 150 100 50
342
ec -9 4 ne 9 D 5 ec Ju 95 ne 9 D 6 ec Ju 96 ne 9 D 7 ec Ju 97 ne 9 D 8 ec -9 Ju 8 ne 9 D 9 ec Ju 99 ne 0 D 0 ec Ju 00 ne 0 D 1 ec -0 Ju 1 ne 0 D 2 ec Ju 02 ne 0 D 3 ec -0 Ju 3 ne 0 D 4 ec Ju 04 ne 0 D 5 ec -0 5 Ju
3 94 ne
D
-9
ec
Ju
D
Ju
ne
93
0
TUNISIA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 42 ■ Public consumption 12 ■ Investment 17
Exports: 43% of GDP
Imports: 47% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
3500
3500
3000
3000
2500
2500
2000
2000
1500
1500
1000
1000
500
500
0
0 France
Italy
Germany Spain
Libya
France
Italy
Germany
Spain
Libya
4
IMPORTS by products ■ All food items 9% ■ Fuels 7% ■ Chemical products 10% ■ Other manufactured products 38% ■ Capital goods and transport equipment 30% ■ Miscellaneous 6%
EXPORTS by products ■ All food items 8% ■ Fuels 9% ■ Chemical products 9% ■ Other manufactured products 56% ■ Capital goods and transport equipment 16% ■ Miscellaneous 2%
STANDARD OF LIVING / PURCHASING POWER Indicators
Tunisia
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
6,850 2,240 0.753 31.5 67 27.5 118 40.5
Regional average DC average 5,860 2,390 0.708 26 59 35 135 38
4,300 1,280 0.697 33 43 31 112 28.4
343
THE MIDDLE EAST AND NORTH AFRICA
United Arab Emirates Population (million inhabitants) GDP (US$ million)
4.0 102,320
Short-term: A2
Coface analysis
Medium-term: Low risk
STRENGTHS ● The economy is among the most open in the region. ● The economic diversification undertaken in Dubai has been successful (aluminium, financial services, tourism). ● Abu Dhabi boasts substantial oil and gas reserves with its oil revenues having allowed it to accumulate substantial holdings abroad that constitute guarantees of the federation’s financial solidity. ● The customs-free areas have attracted foreign investors.
RISK ASSESSMENT The oil boom has bolstered economic activity and fostered local and regional investment, which have been directed to downstream oil industries, services, infrastructure construction and real estate projects, particularly in Dubai. Household consumption has also been dynamic, buoyed by the increasing number of emigrant workers and rising wages. Industry, construction, tourism and transport have been the main growth sectors. Gradual increases in oil sector production capacity have also contributed, albeit more modestly, to the growth. Economic activity should continue to trend up throughout 2006 considering the very bright outlook for the oil market. However, the overcapacity of
344
WEAKNESSES Public sector accounts have remained opaque. ● Although diversified, the economy is still dependent on Abu Dhabi’s oil revenues and exposed to external shock. ● Disagreement has persisted with Iran over that country’s occupation of the Lesser Tumbs, Greater Tumbs and Abu Mousa islands since 1971. ●
existing buildings and increasing prices for basic materials could affect the construction sector and cause a growth slowdown. High barrel prices should generate solid external and fiscal surpluses again and allow the country to add to the assets it holds abroad that guarantee its financial solidity. Although very diversified, the economy has remained very dependent on the oil revenues, notably at the budget level. It is thus still largely dependent on Abu Dhabi. Politically, despite the uncertain regional environment, the economic liberalism practised by government authorities has reassured investors and attracted capital.
UNITED ARAB EMIRATES MAIN ECONOMIC INDICATORS US$ billions
2001
2002
2003
2004
2005(f )
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
1.7 2.7 -0.4 48.4 32.8 15.6 7.3 10.6 28.0 7.0
2.6 2.9 10.4 52.2 37.5 14.6 3.4 4.6 22.5 6.1
11.9 3.1 12.3 67.1 45.8 21.3 7.5 8.6 19.1 5.6
7.4 4.7 18.9 82.8 54.2 28.6 12.9 12.6 20.2 5.2
7.3 5.0 28.6 107.9 61.9 46.0 30.2 24.1 18.7 4.2
6.8 3.8 27.2 118.8 70.7 48.1 32.2 23.5 19.1 3.8
3.7
3.5
2.9
3.0
3.3
3.3 f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview Despite the number of restrictive practices (local majority partner, closure of certain sectors to foreigners, local agent, local sponsor to obtain a residence visa), the United Arab Emirates’ market is very open and highly competitive. In the last ten years, UAE imports have grown on average by 6 per cent per annum. The UAE is a member of the WTO and, through the Gulf Cooperation Council (GCC), party to talks on a free trade agreement with the EU.
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Means of entry UAE customs duties applicable since 1 January 2003, the date of introduction of the customs union of the GCC, are 0 per cent for 417 customs nomenclatures and 5 per cent of the CIF value for other goods. The country’s standards policy is based on that of the GCC. The national standards agency ESMA (Emirates Authority for Standardization and Metrology) was set up in the first half of 2003 to establish nationwide standards and, above all, to play an active role in the harmonization of regulations within the GCC. All modern payment instruments are available in the United Arab Emirates. The cheque, documentary credit collection, promissory note and bill of exchange are not recommended.
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Attitude towards foreign investors The emirate of Abu Dhabi has actively sought FDI both to develop the oil and gas sector and, more recently, to improve management of some of its public services. The emirate of Dubai, faced with the gradual depletion of its oil reserves, is striving to attract foreign investment aimed at stepping up and consolidating economic diversification. The absence of direct taxation of companies (except banks, oil companies and telecommunications operators) and people, of exchange controls and of restrictions on the repatriation of capital act as a magnet for investment. Legislation and legal practices are, on the whole, investment-friendly: adoption of new intellectual property protection laws, moves to open up land ownership to foreigners. However, a number of obstacles to FDI remain. These include the requirement for foreign companies outside the free zones to have a local majority partner in a joint venture and for non-nationals residing in the UAE to have a local sponsor.
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4
Foreign exchange regulations There are no exchange controls in the UAE. The UAE dirham enjoys fixed parity with the US dollar (US$1:AED3.6725). There are no restrictions on capital transfers.
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345
THE MIDDLE EAST AND NORTH AFRICA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 29 ■ Public consumption 11 ■ Investment 16
Exports: 72% of GDP
Imports: 60% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
15000
6000
12000
5000 4000
9000
3000 6000
2000
3000
1000
0
0 Japan
South Korea
Iran
Thailand Singapore
China
Japan
Germany
USA
France
IMPORTS by products ■ Consumer goods 45% ■ Capital goods and transport equipment 38% ■ Intermediate goods 16% ■ Miscellaneous 1%
EXPORTS by products ■ Unrefined petroleum 33% ■ Re-export 33% ■ Miscellaneous 34%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
346
United Regional average DC average Arab Emirates 24,030 18,700 0.849 n/a 88 24.8 280 129
5,860 2,390 0.708 26 59 35 135 38
4,300 1,280 0.697 33 43 31 112 28.4
YEMEN
Yemen Population (million inhabitants) GDP (US$ million)
19.2 10,831
Short-term: C
Coface analysis
Medium-term: Very high risk
STRENGTHS ● Yemen boasts substantial and still littleexploited natural gas reserves. ● It enjoys the support of the international community, which has nonetheless remained attentive to progress on reforms. ● Foreign debt has been a minor constraint due to reductions granted by the Paris Club. ● Remittances from expatriate workers have bolstered the invisibles balance. ● The country has strengthened its cooperation with the United States and Saudi Arabia.
RISK ASSESSMENT The high oil prices driving economic growth have led to the generation of external account surpluses and a build-up of foreign currency reserves. The progressive decline of oil revenues should continue, however, until reserves run out in 15 years. Although implementation of the liquid gas development project should breathe new life into the economy from 2009, the resulting revenues will not fully offset the loss of those from crude exports. In that context, the persistent imbalances of public sector accounts have been disquieting with reforms repeatedly postponed due to fears of a
WEAKNESSES The economy has been dependent on the oil sector whose reserves will run out in 15 years. ● Subsidies, as well as a bloated and inefficient public sector, have been undermining public finances. ● Essential reforms have been repeatedly postponed due to concerns about their social impact. ● The level of corruption has been high. ● Insecurity has affected investments and tourism. ● Qat consumption is a national scourge that has undermined economic activity and its cultivation has impeded better water allocation. ●
4
social explosion. If nothing is done, the accumulation of fiscal and external deficits could cause public sector debt to increase in the medium term to unsustainable levels. In the political arena, the alliance with the United States has intensified opposition from Islamist movements and contributed to a state of insecurity hardly conducive to tourism and investment. President Saleh’s re-election in 2006 could ensure political continuity. However, should he decide not to run, the country would embark on a period of uncertainty.
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THE MIDDLE EAST AND NORTH AFRICA MAIN ECONOMIC INDICATORS US$ billions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2001
2002
2003
2004(e)
2005(f )
2006(f )
4.6 10.7 2.3 3.3 2.8 0.5 0.5 4.8 53.0 5.7
3.9 6.8 -2.8 3.6 3.1 0.5 0.4 3.9 53.6 4.0
3.1 11.9 -5.6 3.9 3.4 0.5 0.1 0.6 48.1 5.8
2.7 12.0 -4.7 4.5 3.9 0.6 0.0 0.1 42.6 4.2
2.9 16.4 -3.6 6.2 4.6 1.6 1.1 7.8 38.3 3.5
2.7 14.8 -4.9 5.8 4.9 0.9 0.8 5.3 36.8 3.9
10.5
11.9
12.0
12.1
11.7
12.3
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview Yemen is arguably a free market economy. There are few restrictions and no discrimination between supplier countries.
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Means of entry Several types of levy apply to imported goods, including ‘duties and taxes’ for all authorized imports. Customs duty is levied at a single rate of 5 per cent on the CIF value. There is also 3 per cent additional tax, a freight tax calculated on the volume and length of storage, plus 5 per cent general sales tax since July 2005 on all goods except flour, wheat, rice, medicines, baby milk and raw gold. Exporters are advised to use either irrevocable letters of credit confirmed by a first rate (preferably foreign) bank, or advance payments. Some Yemeni traders have financial assets abroad and can use them to pay for imports into the country. A letter of credit opened with CALYON (formerly Crédit Agricole Indosuez), the only Western financial institution with branches in Yemen, does not need to be confirmed, particularly if the seller is prepared to cover the risk of non-transfer. Some foreign
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inspection companies (SGS but not Véritas) are represented in Yemen, but do not have offices there. As a result, caution is called for when dealing with inspections and checks. Attitude towards foreign investors Foreign investment is governed by Act No. 22 of 2002. There are also ad hoc laws offering special terms for oil exploration and production, and public works. In general, investors are granted tax breaks and exemptions from customs duty. Investment capital and profits can be freely repatriated at the market rate. The act lays down the principle of equality between Yemenis and foreigners. Foreigners can hold a majority, even a 100 per cent, stake in a local company, but are well advised to team up with a local partner. A labour code (in Arabic) covers key issues, but its interpretation can be a source of confusion. As social protection is poor, some companies take out private insurance cover for their employees.
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Foreign exchange regulations The Yemeni rial fell slightly against the US dollar during the year, and in October 2005 stood at 192 rials to the dollar.
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YEMEN OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 54 ■ Public consumption 10 ■ Investment 13
Exports: 31% of GDP
Imports: 36% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
1500
600
1200
500 400
900
300 600
4
200
300
100
0
0 China
Thailand
India
South Korea
Malaysia
UAE
Saudi Arabia
China
USA
Kuwait
IMPORTS by products ■ All food items 29% ■ Fuels 10% ■ Chemical products 8% ■ Other manufactured goods 24% ■ Captial goods and transport equipment 27% ■ Miscellaneous 3%
EXPORTS by products ■ Petroleum products 88% ■ Miscellaneous 12%
STANDARD OF LIVING / PURCHASING POWER Indicators
Yemen
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
820 520 0.489 25.9 25 45.2 28 7.4
Regional average DC average 5,860 2,390 0.708 26 59 35 135 38
4,300 1,280 0.697 33 43 31 112 28.4
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Sub-Saharan Africa Political Crises Beset East Africa 352 The Range of Country @ratings in Sub-Saharan Africa
355
Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Congo Democratic Republic of Congo Djibouti Eritrea Ethiopia Gabon Ghana Guinea Ivory Coast
360 363 364 368 369 370 373 374 375 377 378 379 380 381 382 386 389 390
Kenya Madagascar Malawi Mali Mauritania Mauritius Mozambique Namibia Niger Nigeria Rwanda São Tomé and Principe Senegal Sierra Leone South Africa Sudan Tanzania Togo Uganda Zambia Zimbabwe
394 397 398 399 400 403 407 410 411 412 415 416 417 420 421 425 426 429 430 434 437
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OUTLOOK FOR 2006
Political Crises Beset East Africa Experts from Oxford Analytica, Oxford
espite significant breakthroughs in ending long-running conflicts in East Africa during 2005, sustained or increasing political tensions across large parts of the region may pose a threat to overall regional stability and economic growth. Much of East Africa remained politically stable and achieved good economic performance during 2005. However, political events towards the end of the year have threatened some of that stability, and this trend is likely to continue into 2006.
D
KEY INSIGHTS ➙ Despite progress on peace processes in Sudan and Somalia, the Horn remains vulnerable to rising political tensions. The Ethiopia–Eritrea border dispute could have regional repercussions if open conflict resumes. ➙ Political tensions in all three East African Community (EAC) countries threaten to undermine economic goals, particularly in Kenya and Uganda. ➙ Rwanda and Burundi are set for relative stability and economic growth – Burundi specifically will be reaping a peace dividend after this year’s elections – and both are poised for EAC membership.
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Horn of Africa. Efforts to reach a peaceful settlement in some of the continent’s most intractable conflicts has brought a measure of relative stability to the region. However, the peace settlements remain vulnerable, and signs of increased tensions are already visible:
●
●
●
Sudan. While the peace settlement between Khartoum and the Sudan People’s Liberation Army/Movement (SPLA/M) is likely to hold, the conflict in Darfur will continue throughout 2006. International attention is likely to be distracted by concerns elsewhere in East Africa (in particular Ethiopia and Eritrea), and demands for a peaceful settlement are unlikely to be matched by the political will in the international community to bring about the creation of a EU/NATO or UN intervention force with a robust mandate. Somalia. The year ahead will see slow progress towards relocating the newly elected government and parliament to Somalia. The key task is to re-establish governance structures inside Somalia and begin the slow task of spreading the government’s authority throughout the country. The United States will continue to focus its attention on the region over security concerns related to terror networks alleged to be thriving in Somalia. Ethiopia/Eritrea. The decline in the already tense relations between Ethiopia and Eritrea at the end of 2005 will extend into 2006, with serious risk of violent conflict breaking out over the disputed border. The international community will seek to force the two countries back to the negotiating table. Even if war is averted, considerable political tension will remain, with little immediate prospect of a permanent settlement being reached.
POLITICAL CRISES BESET EAST AFRICA East African Community. All three countries will face political tensions in 2006 which could undermine the ability of the governments to function effectively: ●
●
●
Uganda. Uganda will hold the country’s first multiparty presidential and parliamentary elections in March. The government has already begun to crack down hard on opposition parties and leaders, and this will continue into 2006, raising the prospect of international condemnation. The arrest and trial of the Forum for Democratic Change (FDC) presidential candidate, Kizza Besigye, will dominate the political arena in early 2006. The ruling National Resistance Movement will probably continue to dominate after the elections (with President Yoweri Museveni returned for a third term), but the result will be challenged by the opposition. Donor relations will continue to chill. Tanzania. Jakaya Kikwete, the presidential candidate for the ruling Chama Cha Mapinduzi (CCM) party, won the delayed poll on 14 December 2005. The CCM is popular on the mainland, and the result will please international donors who will see a continued commitment to reform. However, Tanzania will continue to come under pressure to tackle corruption. On Zanzibar, the fall-out from the October elections will continue throughout 2006. The main opposition party – the Civic United Front (CUF) – has alleged fraud and intimidation, and is seeking to challenge the result that returned the CCM to power. The CUF has announced that its 19 MPs will attend legislative sessions, but will refuse to cooperate with the government, raising the prospect of a political stalemate on the islands. Tensions will remain high on Zanzibar, and the government is likely to crack down hard on any dissent. Kenya. Following the failed referendum on the constitution in November, and the dismissal of the cabinet by President Mwai Kibaki, politics in Kenya in 2006 will focus on the crisis at the heart of the government. Tensions between the
main factions within the ruling National Rainbow Alliance Coalition (NARC) – in particular between the Liberal Democratic Party (LDP) led by Raila Odinga, and the supporters of Kibaki – will reach almost breaking point, and there is a possibility that the LDP will leave the coalition, forcing Kibaki to bring in the Kenya African National Union in order to remain in power. There will be continued demands from opponents to Kibaki for a referendum on a new constitutional draft, which would create a strong prime-ministerial post. Great Lakes. The Great Lakes region remains tense, but an increasing measure of security and stability has been in evidence over 2005 and should continue into 2006: ●
●
Rwanda/Democratic Republic of Congo (DRC). Kigali remains determined to prevent rebel movements based in the eastern DRC from being able to launch attacks into Rwanda. However, it appears to have muffled rhetoric, threatening an invasion in recent months, and relations between Rwanda and the DRC look likely to remain politically tense but relatively stable into 2006. However, this will only continue while the DRC is seen to be actively trying to pursue and eradicate the threat posed by rebel movements. Burundi. Burundi looks set to continue its return to political stability throughout 2006. The new government has the backing of the main rebel movements, and should be able to ensure improved security and stability.
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Economic prospects. Economic prospects will vary across the EAC: ●
●
Concerns over the ability of the government to govern effectively due to political tensions in Uganda and Kenya could affect investor confidence. Uganda could face restrictions on donor funding due to concerns over the democratic process.
353
SUB-SAHARAN AFRICA ●
●
Tanzania looks set to maintain its economic growth and will maintain its reputation for overall stability. Progress is likely to be made on beginning negotiations with Burundi and Rwanda over EAC membership.
However, economic growth looks set to continue in this region of East Africa, despite some concerns over politics. The outlook is less encouraging in the Horn: ●
●
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Despite peace agreements, there remain difficulties in establishing the authority of new governments in Somalia and Sudan. The Ethiopian government’s crackdown on the opposition after the May elections has disrupted the economic reform programme, and lowered donor and investor confidence.
Continued tensions and security concerns will deter investment in 2006, and could possibly affect the wider region. However, Burundi’s economic prospects appear to be good following the political settlement. The new government is working with donors to speed up economic reform and encourage foreign investment. CONCLUSION With political tensions threatening the traditionally most stable countries of East Africa, 2006 looks set to be a difficult year for the region. However, outside the Horn, it will be possible to overcome tensions and political crises, helping to increase stability by the end of the year.
The Range of Country @ratings in Sub-Saharan Africa Sylvia Greisman and Bernard Lignereux Coface Country Risk and Economic Studies Department, Paris
COUNTRY @RATING SCALE
HIGHEST RISK
C B
Emerging Countries A4 A3
World A2
Industrialized Countries A1
Sub-Saharan Africa Economic growth and credit risk 7%
300
6%
250
5% CIS Subsaharan Africa
Latin America Near and Middle East
Central Europe Emerging Asia
200
4%
150
3%
100
2%
50
1% 0%
1997 1998 1999 2000 2001 2002 2003 2004 2005e 2006f
0
European Union (15) Japan North America
LOWEST RISK
A regional country risk @rating represents an average of country @ratings weighted according to their contribution to the region’s production.
Country @ratings measure the average level of shortterm non-payment risk associated with companies in a particular country. They reflect the extent to which a country’s economic, financial and political outlook influences local companies’ financial commitments. They are thus complementary to @rating credit opinions on companies. Many Sub-Saharan African countries benefited from high raw material prices in 2005, allowing them to cope more effectively with rising oil prices. Meanwhile, tight economic policies and efforts on diversification have begun to bear fruit in some cases. In that more buoyant environment, companies have been able to withstand the increased pressure on their margins. Reflecting that improvement, Gabon and Mozambique’s ratings were upgraded from C to B and Zambia’s from D to C. However, although the average level of risk in the
The payment-incident-index curve reflects payment experience on commercial transactions payable in the short-term. The baseline is the world payment-incident average from 1995 through 2000.
region has improved slightly, it is still vulnerable to exogenous shocks and varies widely by country. South Africa (rated A3) has, thus, established itself as a regional leader when business-to-business commerce entails little risk whereas, at the other extreme, the business environment is still unstable in countries like Nigeria or Angola. In 2005, besides the good price trend for raw materials, Sub-Saharan Africa continued to benefit from the South African economy’s new dynamism. Although prices for some farm products (such as cotton) sagged, good harvests overall fuelled growth except in the drought-stricken southern region. Tighter economic policy management, the impact of diversification efforts on the economic fabric, and the transformation of raw materials into higher value-added products, along with implementation of modernization measures, have also begun to have an effect. Moreover, the continued gradual stabilization of the overall political situation, despite persistent trouble spots like the Horn of Africa and Ivory Coast, has benefited growth.
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355
SUB-SAHARAN AFRICA This positive trend augurs well for 2006, even if the region is still vulnerable to exogenous shocks like a possible downturn of world raw material prices or poor weather conditions. In any case, at an estimated 5.4 per cent rate, growth will still be under the 7 per cent annual rate needed to reach the ‘development objectives for the millennium’ by 2015. Similarly, the financial situation of those countries will remain insufficient, only allowing them to marginally reduce their dependence on international aid. In that context, however, the broader international community support decided by the G8 in June 2005 will result in substantial cancellation of the multilateral debt (IMF, World Bank, African Development Bank) of African countries, which will, in conjunction with reductions already obtained under the HIPC programme for highly indebted poor countries,
reduce their foreign debt. It will thus be possible to free up new resources to finance infrastructure development and improvement of health and education services. The impact of implementing such projects will be all the more effective if efforts to improve the business environment continue and new crises do not disrupt the political climate. Countries rated A3 Adverse political or economic circumstances may lead to a worsening payment record that is already lower than the previous categories, although the probability of a payment default is still low. In South Africa, the outlook has remained bright with growth fuelled by robust domestic demand that has benefited industries supplying the domestic market (consumer goods and durables, capital goods, automobiles), and good export
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COFACE MAP OF COUNTRY @RATINGS
356
THE RANGE OF COUNTRY @RATINGS IN SUB-SAHARAN AFRICA performance spurred by the level of world raw material prices and the South African currency depreciation. Those economic conditions have benefited company solvency with payment incident frequency remaining low, in line with the decline of bankruptcies. Although the economy’s dynamism has spurred an increase in imports, foreign financing needs have remained moderate with relatively limited debt. Thanks to large portfolio investment inflows, the capital flow balance is still in surplus. Foreign exchange reserves have increased two-fold as a result, which will allow the country to deal more effectively with a possible financial-market crisis of confidence. Meanwhile, the country’s political stability, borne out of the 2004 elections, has enabled it to cope with domestic social and political tensions.
In Mauritius, economic activity sagged in 2005 amid a decline in sugar production and a drop in textile exports from the customs-free area. However, the good performance of tourism and especially of financial services, the IT industry and the telecommunications sector kept growth at satisfactory levels. The last three sectors will continue to drive economic activity in 2006, even if the impact on employment of developments in the sugar and textiles sectors, in conjunction with the impact of higher oil product prices, could impede growth. In the longer term, however, reorganization of the two shaky sectors should allow the country to overcome those difficulties. In that context, the financial situation of some companies has deteriorated slightly, as reflected by the increase in the Coface payment incident index, which has nonetheless remained near the world average.
COFACE MAP OF MEDIUM- AND LONG-TERM COUNTRY RISK 2
5
2 2 2
2 2 1
2 1,2
2 1,2
2
2
2
1
Except oil sector Except international finance or FDA
357
SUB-SAHARAN AFRICA Countries rated B An unsteady political and economic environment is likely to affect further an already poor payment record. In Senegal, the strong growth of 2005 should continue in 2006 despite the effect of oil prices on household consumption and chemical industry competitiveness. The impact on economic activity of the growth of public infrastructure investments, which have been lagging somewhat, will be greater in 2006. With public sector financial management remaining strict, it has been possible to keep the deficits under control and free up the resources needed to maintain infrastructure investment (education, health, transport) at satisfactory levels. Although the external account deficits have been keeping financing needs high, foreign debt reduction should nonetheless ensure that the country’s financial situation remains sustainable. Tanzania has continued to experience dynamic economic conditions, buoyed by the good performance of farm production, mineral extraction and tourism, and by the emergence of a manufacturing sector. Furthermore, continued efforts on major structural and institutional reforms that will foster progressive economic diversification have consolidated the growth. Except for the semiautonomous island of Zanzibar, the country has enjoyed a peaceful environment and remarkable stability, reflected by the outcome of the December 2005 general elections. However, the country’s deficient infrastructure and widespread poverty have limited its attractiveness for investors. With its external account imbalances and despite substantial debt reduction under the HIPC programme, Tanzania has remained very dependent on international aid. The outlook for Cameroon has been encouraging after the difficulties it experienced over the past two years. Consolidating public sector accounts allowed the country to conclude a new three-year programme with the IMF in October 2005, foreshadowing a substantial reduction of foreign debt in 2006. In that framework, the pace of structural reforms should accelerate. It will foster a resumption of public and private investment and support growth, notably of the non-oil sector. The
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programme’s implementation and durability will nonetheless depend on continuation of tight fiscal policy. As in past years, Mozambique should post high growth in 2006, driven by the extractive and manufacturing sectors, buoyed themselves by large industrial projects. However, this performance has not yet produced significant improvement in public sector accounts, which have been in deficit. Moreover, while Mozambique has benefited from a substantial reduction of public sector foreign debt, private debt has increased with the country remaining dependent on aid to cover its financing needs. In the longer term, its political stability, borne out of the December 2004 general elections, should allow the country to take structural reforms further and maintain its attractiveness for foreign investors. Countries rated C A very unsteady political and economic environment could deteriorate an already bad payment record. In Kenya, the situation has remained uncertain due to political tensions intensified by the November constitutional referendum, lost by the government. At this juncture, however, those tensions have not affected the economic situation. The good performance of the farm, tourism and telecommunications sectors contributed to a marked acceleration of growth that could exceed 5 per cent in 2006. Moreover, adoption of a new privatization law in August 2005 should foster increased investment. Those buoyant economic conditions have contributed to consolidation of public sector finances and reduction of the national debt. However, the growth of exports and tourism earnings has not sufficed to offset the increase in capital goods imports and higher oil prices, which have widened external account deficits. Several factors have buoyed Zambia’s economic growth: high copper prices, tourism performance and the impact of productivity improvement measures on farm production. Those favourable economic conditions and tight fiscal policy have facilitated the public sector financial consolidation. With the country’s financing needs
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THE RANGE OF COUNTRY @RATINGS IN SUB-SAHARAN AFRICA nonetheless remaining high, it is still dependent on international aid to cover them. Progress on structural reforms has allowed Zambia to benefit from the backing of multilateral financial institutions, which in 2005 resulted in a marked reduction of the foreign debt burden under the HIPC programme. Countries rated D The high risk profile of a country’s economic and political environment will further worsen a generally very bad payment record. In Nigeria, the extraction of oil and gas is still driving economic growth; this is limited, however, by deficient infrastructure, decades of poor publicservice management and a difficult business environment. The level of oil prices has sharply improved external and public sector accounts. This context has thus far facilitated a speed-up of the structural form implementation demanded by financial backers and, in October 2005, the country successfully negotiated a sharp reduction of its foreign debt with the Paris Club. However, in the run-up to general elections in 2007, the pace of reforms, which has been stirring
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strong opposition, could slow, or even stall completely. The political environment has remained marked by major governance issues, ethnic and religious tensions, and the oil resourcesharing problem, with southern producer countries considering themselves short-changed. In Angola, economic growth should remain dynamic in 2006 – despite the slowdown in putting new fields into production – thereby enabling the country to free up the resources needed to begin resolving its profound economic and social problems. The growth has only slowly been spreading to the rest of the economy and, as a whole, economic stabilization has been a shaky process. The improvement in public sector balances, achieved thanks to oil income, has masked the economy’s precarious structure with limited non-oil revenues and extensive spending (wages, debt service, reconstruction). Similarly, a very negative invisibles balance, attributable to dividend transfers by oil companies and the cost of repaying foreign debt, has limited a nonetheless large trade surplus.
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359
SUB-SAHARAN AFRICA
Angola Population (million inhabitants) GDP (US$ million)
13.5 13,189
Short-term: C
Coface analysis
Medium-term: Very high risk
STRENGTHS ● Sub-Saharan Africa’s second oil-producing country and a non-OPEC member, Angola represents a strategic interest for both Western countries and Asia’s major oil importers (China, India). ● Oil extraction has generated foreign currency earnings and attracted FDI inflows. ● Outside oil, the country boasts varied economic potential: diamonds, minerals, hydroelectricity, agriculture and fishing.
RISK ASSESSMENT Increased oil extraction allowed Angola to post very high growth in 2005 and to free up resources to begin resolving its severe economic and social problems. Growth should remain dynamic in 2006 despite a slowdown in putting new fields into production. The oil sector has nonetheless remained the main growth driver with its effects only spreading slowly to the rest of the economy. Moreover, economic stability has remained vulnerable. Despite significant progress, inflation is still high. Improvement in public sector balances,
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WEAKNESSES Several factors have impeded development of non-oil sectors – dilapidated infrastructure, governance problems and the demographic, health and social consequences of 20 years of civil war. ● The opacity of public sector finances and insufficient restructuring continue to mark the economy. ● Lacking the benefit of concessional loans, the country has had to resort to costly market debt to cover its financing needs. ● Although the civil war ended in 2002, separatist tensions have persisted in the oil-rich Cabinda enclave. ●
thanks to oil revenues, has masked structural weakness linked to the limited scope of non-oil revenues and the extent of spending on wages, debt service and reconstruction. Similarly, a very negative invisibles balance, attributable to oilcompany dividend transfers and the cost of repaying foreign debt, has limited an otherwise large trade surplus. The holding of the first pluralist elections since 1992 – scheduled for end-2006 (legislative) and early 2007 (presidential) – should consolidate the political stability that has lasted since the civil war ended.
ANGOLA MAIN ECONOMIC INDICATORS US$ billions
2001
2002
2003
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
3.1 153.0 -3.6 6.6 3.2 3.4 -15.2 107 48.1
14.4 109.0 -9.4 8.3 3.7 4.6 -1.4 90 20.9
3.4 98.0 -7.1 9.5 5.5 4.0 -5.2 79 18.9
1.1
0.5
0.9
2004
2005(e)
2006(f )
11.2 45.3 -4.0 13.7 6.7 6.9 6.8 55 14.0
14.1 30.0 3.7 17.3 8.6 8.7 4.7 43 10.4
9.2 32.0 4.6 22.3 9.9 12.4 4.8 33 6.9
2.0
1.9
1.9
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Means of entry The country is highly import-orientated and is dependent for 90 per cent of its consumption and investment on imported goods. There are no protectionist customs barriers. Duties range from 2 to 30 per cent. Although simplification of import procedures (establishment of a single customs document) is on the agenda, the policy has not yielded the desired results and the country remains one of the most bureaucratic in the world. Red tape at the ports authority, customs service and government departments hampers economic and trade development. Angola does not apply a preferential tariff to countries belonging to the Southern Africa Development Community (SADC), despite being a member. However, tax exemptions are granted to imports intended for foreign investment projects undertaken in priority areas. Exporters are strongly advised to check the existence of funding and the solvency of partners. They should demand cash payment with their order or payment by irrevocable documentary credit confirmed by a leading bank. As far as public tenders are concerned, investors should only bid for those financed by multilateral institutions.
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Attitude towards foreign investors Reform of the investment code has been undertaken but remains incomplete as it still does not offer all the guarantees foreign investors might reasonably expect. The system has been liberalized and brought into line with that of the other SADC member countries, but remains complex and short on incentives. The National Foreign Investment Agency (ANIP) – a onestop shop – seeks to bring together the main government departments, but is unwieldy and inspires little confidence. Formalities are lengthy and each step of the approval process has to be followed up by a local partner or lawyer. At all echelons of the administration, investors face practices that are incompatible with those of a modern state. Despite innovative language and genuine attempts to open up the country to trade and reforms over the last three years, ideological archaisms survive in the form of administrative obstacles, patronage at all levels of government, widespread corruption and lack of transparency in public accounting. Legally established foreign enterprises are subject, more than their national counterparts, to untimely tax audits and frequent inspections by the employment and health departments. Furthermore, the legal system falls way short of providing all the necessary safeguards.
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361
SUB-SAHARAN AFRICA Foreign exchange regulations The kwanza (the country’s non-convertible currency) has steadied since July 2004 and at October 2005 was AOK88–91 to the US dollar. The
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banking system is becoming more professional and moves are under way to adopt international standards. The securities exchange set up in 2004 is still at an embryonic stage.
OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 38 ■ Public consumption 21 ■ Investment 19
Exports: 71% of GDP
Imports: 67% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
5000
1000
4000
800
3000
600
2000
400
1000
200
0
0 USA
China
France
South Korea
Belgium
Portugal
South Africa
USA Netherlands France
IMPORTS by products ■ Consumer goods 63% ■ Intermediate goods 11% ■ Capital goods, transport eqipment 26%
EXPORTS by products ■ Petroleum 91% ■ Diamonds 8% ■ Miscellaneous 1%
STANDARD OF LIVING / PURCHASING POWER
362
Indicators
Angola
Regional average
DC average
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
1,910 740 0.445 n/a 36 47.6 7 1.9
1,750 500 0.481 36 36 44 11 12
4,300 1,280 0.697 33 43 31 112 28.4
BENIN
Benin Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
6.7 3,476 519
Short-term: B
Coface analysis
Medium-term: High risk
RISK ASSESSMENT Economic growth resumed in 2005 with the economy benefiting from the resumption of trade relations with Nigeria, underscoring its dependence on that country. In that context, the outlook for 2006 has been bright, notwithstanding the gloomy prospects in the cotton sector and a public sector financial situation not conducive to fiscal stimulatory policy. With the tax base already limited by the extent of poverty and the informal economy, the transit slowdown in the Port of Cotonou has reduced customs revenues, which contributed to widening the deficit. Regularisation of arrears incurred in
2004 and the cost of preparing the 2006 presidential elections has undermined recovery prospects. Moreover, external account imbalances should persist, despite debt reduction and cancellation arrangements benefiting Benin under the HIPC programme. It has thus remained dependent on the support of donor countries, which led to the conclusion of a new three-year agreement with the IMF in August 2005. However, to continue to benefit from that support, the new government team emerging from the March 2006 elections (with President Kerekou not running again) will have to revive a structural reform process that has been lagging these past three years.
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MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
5.0 4.0 -4.2 210 467 -256 -10.4 72 13.7
4.5 2.4 -4.3 235 619 -383 -8.6 59 12.7
3.9 1.5 -3.7 324 772 -448 -8.5 41 6.9
2.7 0.9 -4.5 359 865 -505 -8.7 39 5.5
3.9 2.5 -6.1 346 821 -475 -8.7 43 6.1
4.4 2.5 -5.5 371 898 -527 -8.7 42 5.9
10.2
8.3
5.5
3.8
4.0
3.6
e = estimate, f = forecast
363
SUB-SAHARAN AFRICA
Botswana Population (million inhabitants) GDP (US$ million)
1.7 7,530
Short-term: A2
Coface analysis
Medium-term: Low risk
STRENGTHS ● The country has substantial mining resources, gas, copper, nickel and, especially, diamonds, which represent 25 per cent of world production, 50 per cent of fiscal revenues and 80 per cent of export earnings. ● Tourism and services (financial, telecommunications) are well developed. ● With its democratic stability, low level of corruption and good quality infrastructure, Botswana is one of Africa’s best-rated countries. ● The country’s external account surpluses have resulted in abundant foreign exchange reserves and low foreign debt.
RISK ASSESSMENT The stability of Botswana’s political environment and economic policies – notably the discipline exercised by government authorities in managing revenues derived from diamond extraction – underlies the country’s good performance. The country will nonetheless still have to meet several challenges, namely the effects on economic growth of diamond production stabilization and the spread of the AIDS pandemic; the substantial increase in health and social spending, which has undermined
364
WEAKNESSES With diamond production expected to stabilize, efforts to diversify the economy have been slow to produce results. ● A landlocked country with a narrow economic base, Botswana has remained in South Africa’s trade and financial orbit, which has tended to limit its attractiveness to investors. ● Despite its successes, it nonetheless has to contend with serious poverty problems (30 per cent of the population) and high unemployment (23 per cent). ● The AIDS pandemic afflicting one-third of the adult population will affect the longer-term economic and financial outlook. ●
public sector finances and led to offsetting cutbacks in public investment that have also contributed to the economic slowdown; and the May 2005 pula devaluation that has spurred price increases. Authorities nonetheless enjoy ample room for manoeuvre in meeting those challenges. External accounts should continue to generate comfortable surpluses with foreign exchange reserves remaining at high levels and foreign debt remaining limited. Moreover, with its good solvency, the country has earned high marks from rating agencies.
BOTSWANA MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
2.1 6.6 -3.7 2,326 1,612 714 11.5 22.8 4.2
7.8 8.1 -4.3 2,353 1,735 618 2.2 23.0 3.7
5.7 9.6 -2.5 2,976 2,018 958 6.5 16.7 2.9
4.1 6.6 -4.5 3,502 2,870 633 9.8 17.0 2.8
3.7 8.4 -2.2 3,845 3,045 799 9.1 16.7 2.4
3.6 7.0 -1.5 3,995 3,293 702 6.7 16.4 2.3
36.3
25.2
21.6
19.3
18.6
17.8
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET ■ Market overview Botswana is a member of the Southern Africa Customs Union (SACU) along with Lesotho, Swaziland, Namibia and South Africa. Ad valorem common external tariffs and excise duties apply to third countries. The extension to SACU countries of the Trade, Development and Cooperation Agreement between the EU and South Africa ensures preferential access for Botswanan products to European markets. The country is also eligible under the African Growth and Opportunity Act (AGOA) for access to the North American market. In October 2002, Botswana teamed up with other SACU members to sign a fresh customs protocol establishing a new mechanism for resolving commercial disputes and setting customs tariffs. Botswana is also an active member of the South African Development Community, which comprises 14 southern African countries and is headquartered in Gaborone. The local market, however, remains narrow and mainly concentrated in towns to the east of the country. ■ Means of entry The country’s customs regulations grant duty free admission to raw materials and machinery imported for the manufacture of products intended for export. Other tax measures include exemption from
sales tax on raw materials used in exported products. Sales agents of any nationality are allowed to operate, though local agents and representatives are predominant. Public invitations to tender and large-scale work contracts comply with internationally recognized standards. Imported goods are usually invoiced in rands, US dollars or sterling. The euro is starting to gain acceptance as legal tender for trade, albeit to a limited degree. Payment instruments available in Bostwana are similar to those in Europe and the United States. ■ Attitude towards foreign investors Botswana possesses a number of investment-grade assets that make it one of the most competitive countries in Africa. It has a liberalized economy, no exchange controls, a convertible currency, attractive tax laws (15 per cent corporation tax for manufacturing companies, 25 per cent for the rest; 10 per cent VAT from July 2002) and peaceful industrial relations. The Botswana Export Development and Invesment Authority (BEDIA) encourages investment in the country, especially through export-related projects and import substitution. Priority sectors include manufacturing (glass, tanneries, textiles etc), ICTs, tourism and financial services. There is an International Financial Centre, but it is having teething trouble. The legal system is founded on common law principles. Judicial procedures are highly liberal
5
365
SUB-SAHARAN AFRICA and similar to those in developed countries. As for investment safeguards, Botswana is a signatory to both the World Bank’s MIGA agreement and the OPIC agreement with the United States. A reciprocal investment promotion and protection agreement with France has been under negotiation for several years and could be finalized shortly. A tax agreement with France, signed in 1999 and in force since 1 June 2003, covers income earned from 1 January 2004 or during an accounting year commencing on the same date. ■ Foreign exchange regulations Botswana’s foreign exchange reserves allow it to be very flexible in this matter. There are no exchange
366
controls. The fully convertible local currency, the pula, was introduced after the country’s withdrawal from the rand area in 1976. However, the pula remains dependent on the rand’s movements. On 30 May 2005, Botswana adopted a crawling peg system that enables it to carry out successive adjustments against the same basket of benchmark currencies (rands and special drawing rights). There are no restrictions on capital transfers by non-residents. Dividends and capital can be freely repatriated by foreign investors upon payment of 15 per cent withholding tax.
BOTSWANA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 19 ■ Public consumption 26 ■ Investment 20
Exports: 44% of GDP
Imports: 34% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
3000
2500
2500
2000
2000
1500
1500 1000
1000
500
500 0
0 UK
European SACU Zimbabwe USA Union
SACU European Zimbabwe Union
USA
South Korea
IMPORTS by products ■ All food items and tobacco 12% ■ Wood and paper 8% ■ Chemical products 9% ■ Fuel 17% ■ Metal products 7% ■ Electrical and electronic equipment 18% ■ Capital goods and transport equipment 11% ■ Miscellaneous 18%
EXPORTS by products ■ Diamonds 80% ■ Nickel and copper 5% ■ Miscellaneous 15%
5
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
Botswana 8,370 3,530 0.565 56.6 50 41.5 75 40.7
Regional average DC average 1,750 500 0.481 36 36 44 11 12
4,300 1,280 0.697 33 43 31 112 28.4
367
SUB-SAHARAN AFRICA
Burkina Faso Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
12.1 4,182 346
Short-term: B
Coface analysis
Medium-term: High risk
RISK ASSESSMENT In 2005, the decline of farm production, particularly of cotton, and the repercussions of rising oil prices on the entire economy undermined economic growth despite the steadiness of services. Besides telecommunications, the development of routes to bypass Ivory Coast buoyed the transport sector in particular. Economic growth should nonetheless regain momentum in 2006 with the opening of new gold mines. The public sector’s financing needs have continued to increase. The higher tax revenues fostered by the good economic conditions have still not been enough to significantly enlarge the tax base, with capital spending remaining at high
levels. Meanwhile, external accounts, undermined by oil-product imports, have suffered from the decline of prices for cotton, which has generated 66 per cent of foreign currency earnings. The country has, moreover, remained dependent on international aid despite the foreign debt reduction granted under the HIPC programme (completion point in 2002). President Campaoré’s landslide re-election for a third term in November 2005, with 80 per cent of the votes cast, would attest to the country’s political stability, which has facilitated implementation of major structural reforms. However, Burkina Faso is still one Africa’s poorest countries, a situation that can spur social tensions.
MAIN ECONOMIC INDICATORS
368
US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (GS&T exports) Foreign exchange reserves (in months of imports)
6.7 4.7 -10.9 220 526 -306 -14.1 54 16.6
5.2 2.3 -10.0 262 615 -353 -12.6 50 13.1
8.0 2.0 -8.2 359 767 -408 -12.7 43 17.6
4.6 -0.4 -8.6 477 868 -391 -10.7 38 8.4
3.5 4.0 -9.6 451 915 -464 -12.3 39 6.6
5.0 2.0 -10.7 522 1,080 -558 -12.8 41 6.3
4.8
4.7
5.6
4.9
4.1
3.6
e = estimate, f = forecast
BURUNDI
Burundi Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
7.2 595 83
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT The political transition, initiated by the 2000 Arusha Accords, culminated with a series of municipal and then legislative elections held without incident in 2005. However, President Nkurunziza, a Hutu elected by parliament in the framework of the new constitution, will have to deal with unresolved political problems. The process of disarming and reintegrating former rebels has been lagging. Substantial numbers of refugees remain in neighbouring countries and a movement not subscribing to the peace accords has continued to conduct guerrilla operations.
Carrying out this two-fold process could further undermine an already shaky economic and financial situation. Although economic growth should continue to benefit from reconstruction projects and depend on good harvests, it will not be enough to reduce the extreme poverty affecting the population. Public and external account imbalances have, moreover persisted, with the country dependent on international aid. In that context, Burundi acceded to the HIPC programme, which will allow it to reduce an unsustainable foreign debt burden.
5
MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (GS&T exports) Foreign exchange reserves (in months of imports)
2.1 9.3 -7.2 39.0 108.0 -69 -16.1 163 91.3
4.5 -1.2 -5.7 31.0 104.0 -73 -18.6 182 84.5
-1.2 10.7 -13.8 38.0 126.0 -88 -21.3 225 75.5
4.8 8.0 -19.7 48.0 143.0 -95 -24.3 208 94.9
5.0 16.3 -20.9 69.0 203.0 -134 -28.9 192 56.6
5.0 7.8 -15.9 69.2 199.9 -131 -25.3 170 54
0.5
1.4
1.1
1.0
1.3
1.2
e = estimate, f = forecast
369
SUB-SAHARAN AFRICA
Cameroon Population (million inhabitants) GDP (US$ million)
16.1 12,491
Short-term: B
Coface analysis
Medium-term: High risk
STRENGTHS ● Cameroon boasts natural resources (agriculture, wood, energy), allowing it to broaden its economic base. ● The degree of economic diversification is one of the greatest in the region. ● Political stability and the speed-up of structural reforms could boost growth potential and investor interest. ● The country’s admission to the HIPC programme should result in a substantial reduction of its foreign debt and, thus, allow it to devote additional resources to development.
RISK ASSESSMENT Economic activity sagged in 2005 with oil production declining and manufacturing production affected by an inadequate electricity supply. Meanwhile, tight fiscal policy impeded growth after lax management of public sector finances the previous year had resulted in suspension of the IMF programme, then under way. The outlook for 2006 has appeared brighter. In the framework of the new three-year programme concluded with the IMF in October 2005, the pace of structural reforms should accelerate. That will
370
WEAKNESSES Economic activity is still dependent on exogenous factors, notably raw material prices and weather conditions. ● Although in decline, the oil sector still represents 25 per cent of tax revenues and 40 per cent of exports. ● Pursuit of tight fiscal policy over the long haul is still uncertain, thus inviting vigilance from donor countries. ● Deficient infrastructure and serious governance problems have persisted. ● Combating poverty still constitutes a major challenge. ●
spur a recovery of public and private investment and, thus, buoy growth, particularly in the non-oil sector. The programme’s implementation and continuation will remain dependent on pursuit of tight fiscal policy. Pending foreign debt reduction, the current account will remain in deficit, surplus oil revenues notwithstanding. The country’s political stability, unlikely to be jeopardized by preparations for legislative elections in 2007, should also facilitate economic recovery. Moreover, the tensions with Nigeria over the Bakassi Peninsula should not result in open conflict.
CAMEROON MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(f )
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
5.3 4.5 1.4 1,929 1,863 66 -5.9 97.3 12.6
4.0 2.8 0.8 2,206 2,120 86 -6.4 86.7 28.3
4.1 0.6 0.7 2,638 2,374 264 -2.6 73.5 28.1
3.5 0.3 -0.8 2,882 2,832 50 -3.1 60.3 10.4
2.8 1.3 1.6 2,925 2,811 114 -2.6 54.4 11.3
4.2 1.8 0.7 3,592 3,185 407 -1.4 53.3 11.6
1.3
2.2
2.0
2.4
2.2
2.0 f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview The Cameroon market is open to imports and the authorities apply no special protectionist measures or tariff barriers. Customs duties on imports into the Economic Monetary Community of Central Africa (EMCCA) area range from 5 per cent for staple commodities, 10 per cent for raw materials and capital goods, 20 per cent for semi-finished and miscellaneous products to 30 per cent for certain consumer goods. In addition, there is 19.25 per cent VAT (up from 18.7 per cent since 1 January 2005) on all goods except staple commodities, plus excise duty on so-called luxury products. Red tape remains a problem, with customs clearance taking several weeks. Exporters are strongly advised to demand cash payment upon confirmation of the order, or payment by irrevocable letter of credit confirmed by a first rate bank.
■
Attitude towards foreign investors A developing country heavily dependent on foreign capital, Cameroon has an open policy towards foreign investment. The Investment Act was replaced in 2002 by an Investment Charter. Broadly similar in content to the EMCCA charter, this
■
legislation was supposed to have been supplemented with sector-specific laws for 40 or so sectors by April 2004. So far, however, the only laws passed concern gas, mining and oil. A law introduced in July 2004 extends the current provisions of the Investment Act and the arrangements in place for the industrial free zone until the end of the new transition period in April 2007. The Investment Act 1990 remains de facto in force. Revised in 1994 as part of the tax and customs reforms of the Central African Economic and Customs Union, the 1990 Act offers some tax incentives. These incentives are subject to the usual conditions, ranging from the hiring of local staff and use of local resources to the export of a proportion of turnover and joint ventures with local partners. Taxation has been simplified. A bilateral double taxation agreement between France and Cameroon came into force on 1 January 2003. The country also has an Investment Act Management Unit designed to promote investment and assist investors. This unit is to be replaced by a brandnew investment promotion agency (API). Set up by an order in council dated 1 September 2005, the agency will be run by an as yet undetermined Board of Directors and a Directorate General.
5
371
SUB-SAHARAN AFRICA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 57 ■ Public consumption 10 ■ Investment 14
Exports: 26% of GDP
Imports: 25% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
500
400 350 300 250 200 150 100 50 0
400 300 200 100 0 Spain
Italy
France
France Netherlands USA
Nigeria
Japan
USA
China
IMPORTS by products ■ All food items 19% ■ Fuel 12% ■ Chemical products 14% ■ Other manufactured products 22% ■ Capital goods and transport equipment 28% ■ Miscellaneous 5%
EXPORTS by products ■ All food items 20% ■ Agricultural raw material 20% ■ Fuel 49% ■ Manufactured goods 7% ■ Miscellaneous 4%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
372
Cameroon 1,990 630 0.497 35.4 51 41.1 7 5.7
Regional average DC average 1,750 500 0.481 36 36 44 11 12
4,300 1,280 0.697 33 43 31 112 28.4
CAPE VERDE
Cape Verde Population (inhabitants) GDP (US$ million) GDP per capita (US$)
500,000 588 1,251
Short-term: C
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT The increase in tourist traffic and the influx of public and private investment in the civil engineering sector (hotels, airports, infrastructure) fuelled economic growth in 2005. Moreover, the pegging of the escudo to the euro has made it possible to contain inflationary pressures, linked notably to rising fuel costs. Those trends should continue in 2006. Implementation of structural reforms would pave the way for consolidating growth in the longer term and diversifying the country’s economic base. With limited export potential, the country has been dependent on imports of food, energy and
durable goods, which have generated a large trade deficit, nonetheless partly offset by substantial inflows of expatriate remittances and tourism earnings. Massive international aid has been covering the balance of external financing needs and the public sector financial deficit. That aid has been particularly necessary in view of Cape Verde’s heavy foreign debt burden, with the country ineligible for the HIPC programme (and not benefiting from Paris Club debt rescheduling). For that reason also, the presidential and legislative elections of January and February 2006 should not jeopardize the stabilization policy.
5
MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
4.7 3.8 -10.5 37 232 -196 -14.6 94.7 17.4
5.5 1.8 -11.3 47 310 -263 -11.3 103.1 10.3
6.2 1.2 -9.0 59 383 -324 -9.0 105.7 9.6
4.5 1.9 -7.9 64 426 -363 -7.9 101 10.0
6.0 0.8 -9.4 65 455 -390 -9.4 77.2 9.7
7.0 2.0 -9.2 66 466 -400 -9.2 77.2 8.1
1.4
1.4
1.8
2.5
2.6
2.5
e = estimate, f = forecast
373
SUB-SAHARAN AFRICA
Central African Republic Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
3.9 1,198 307
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT The political transition initiated by General Bozizé’s coup in March 2003 ended in spring 2005 with legislative and presidential elections consolidating his political base. The political situation has nonetheless remained unstable amid a still shaky security situation, particularly in the north, which has triggered refugee flows to neighbouring countries and limited the prospects for economic recovery. The economic and financial situation is still difficult. Persistent insecurity, the country’s landlocked situation, dilapidated infrastructure, competition from the informal economy and widespread corruption have tended to deter investment and limit growth prospects. Driven by
recovery in the farm and mining sectors, the growth rate should remain at levels far below the country’s needs. That situation has contributed to financial imbalances in a public sector marked by a very narrow tax base, an insolvent parapublic sector and arrears, notably on wages and repayment of both domestic and foreign debt. External accounts have remained in deficit with an unsustainable debt burden. The country is still dependent on international aid. It will be unable to benefit from debt cancellation in the HIPC framework until after it implements the post-conflict programmes granted by the IMF since 2004.
MAIN ECONOMIC INDICATORS US$ millions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
374
2001
2002
2003
2004
2005(e)
2006(f )
0.3 3.8 -4.3 140 105 34 -5.5 85 19.7
-0.6 2.3 -5.0 162 139 23 -6.4 102 21.5
-7.6 4.4 -4.6 137 132 4 -7.2 111 26.5
1.3 -2.2 -5.5 137 151 -14 -9.6 100 25.5
2.2 2.4 -4.5 143 157 -14 -6.8 96 31.7
3.5 2.3 -3.3 170 210 -41 -8.8 94 23.9
6.7
5.7
6.4
5.9
6.0
5.0
e = estimate, f = forecast
CHAD
Chad Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
8.6 2,608 303
Short-term: C
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT Since Chad’s entry into the oil era in 2003, hydrocarbon production has reached its current ceiling of level 225,000 barrels a day, which explains the growth slowdown in 2005. The farm and services sectors, as well as increased public sector investment financed by oil earnings, have been driving the economy. However, with Chad’s oil selling at a discount due to its quality and the cost of shipping it 1,300km to the Atlantic Ocean and with the World Bank stipulating the oil-revenue allocation formula, the oil earnings have proven insufficient to reduce the public sector financial deficit. Government authorities could, thus, avoid neither the implementation of austerity measures or the accumulation of new arrears. Conversely, a large trade surplus has allowed significant reductions in the current account deficit and the country’s external financing needs. Although forecasts for 2006, based on continued oil production, have been good, whether
they will materialize is uncertain considering Chad’s structural and political weaknesses. The cotton industry’s difficulties, an irregular power supply and a difficult business environment have limited the country’s attractiveness. Moreover, the unilateral decision taken by government authorities to adjust the oil-revenue allocation formula, and thereby benefit from additional resources, could sour the country’s relations with the international financial community and delay the debt cancellation expected under the HIPC programme. Meanwhile, in the run-up to the presidential elections scheduled for June 2006, political tensions have heightened amid exacerbation of social tensions and, especially, the development of rebel movements joined by key government figures. In conjunction with the increased tensions with Sudan, accused of giving support to the rebel, that unrest has raised doubts about the government’s capacity to implement the reforms needed to allow the country to emerge from poverty.
5
375
SUB-SAHARAN AFRICA MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
9.5 12.4 -10.7 186 510 -324 -38 76 14.0
9.9 5.2 -12.5 170 807 -638 -53 68 21.6
11.3 -1.8 -16.3 459 847 -388 -42 62 9.5
29.6 -5.3 -9.9 2,185 923 1,263 -19 43 2.4
6.0 3.0 -11.2 2,886 894 1,992 -8.0 39 2.5
7.0 4.0 -10.2 2,653 785 1,867 -5.0 38 2.5
1.7
1.8
1.6
1.2
1.5
1.7
e = estimate, f = forecast
376
CONGO
Congo Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
3.8 3,564 938
Short-term: C
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT The consolidation of a nonetheless still weak political situation, the level of oil prices and firmness of non-oil sectors (wood processing, a farm recovery, increased production capacity of small manufacturers) contributed to a sharp economic upturn in 2005. However, with a difficult business environment, dilapidated infrastructure and oil production levelling off, growth should slow in 2006. Oil market conditions have facilitated financial consolidation efforts. Public sector financial management and the transparency of oil revenues have been improved. A start was made on settling
arrears on domestic debt. The rescheduling arrangement agreed with the Paris Club in December 2004 reduced foreign debt repayments. Meanwhile, reflecting the increase in export revenues, the current account has been in surplus despite a substantial deficit on services. The country nonetheless has other major challenges to meet. Efforts on the structural reforms required by the IMF according to the three-year agreement concluded in December 2004 must continue. Moreover, Congo is one of the countries with the most debt per capita in the world. Trade debt secured by oil revenues has remained very substantial and will be difficult to renegotiate.
5
MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
3.8 0.8 -0.7 1,956 670 1,286 -5.6 236 41.8
4.6 3.1 -8.1 2,537 787 1,751 0.6 245 31.8
0.8 1.5 0.4 2,907 907 2,001 1.0 265 23.8
3.6 3.6 3.9 3,725 1,184 2,542 2.3 209 19.9
7.5 2.0 14.8 3,858 1,141 2,717 4.9 171 18.8
4.8 2.0 10.1 3,809 1,222 2,587 3.0 159 17.9
0.4
0.2
0.2
0.4
0.6
0.9
e = estimate, f = forecast
377
SUB-SAHARAN AFRICA
Democratic Republic of Congo Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
53.2 5,671 107
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT The political transition engaged after installation of a national unity government in June 2003 has continued, but at a slower pace than expected. Although the constitutional referendum was held in December 2005, the legislative and presidential elections planned for June 2005 had to be postponed until spring 2006. The political and social situation has remained tense in that context with the government encountering difficulties in extending its authority throughout the country. Despite the efforts of UN forces, many eastern and southern regions still constitute areas of instability controlled by diverse militias. Although the economic recovery has continued, the government is still facing enormous challenges
with limited room for manoeuvre. A very narrow tax base attributable, among other factors, to a very large informal economy and extensive corruption, has been undermining public sector finances. Moreover, the slow pace of structural reform implementation, a difficult business environment and deficient infrastructure have not facilitated exploitation of the country’s vast natural resources, with large external account imbalances persisting in consequence. The country has thus remained dependent on international aid that has taken the form of a three-year IMF programme concluded in 2002 and extended until June 2006, which has allowed it to obtain substantial foreign debt reduction in the framework of the HIPC programme and the Paris Club.
MAIN ECONOMIC INDICATORS
378
US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
-2.0 357 -1.7 880 807 73 -11.0 258 74.2
3.5 25 -2.4 1,076 1,093 -17 -5.3 192 2.9
5.6 13 -5.9 1,340 1,496 -156 -9.8 184 8.0
6.8 9 -5.8 1,813 2,056 -243 -12.1 160 4.4
6.6 23 -11.6 2,042 2,465 -423 -16.2 155 5.9
7.0 6.0 -9.1 2,044 2,607 -563 -15.4 65 8.6
0.2
0.5
0.5
1.0
1.2
1.5
e = estimate, f = forecast
DJIBOUTI
Djibouti Population (inhabitants) GDP (US$ million) GDP per capita (US$)
705,000 576 817
Short-term: C
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT Spending by foreign troops stationed in Djibouti and investments, notably in port infrastructure, have continued to drive economic growth, although not enough to significantly reduce poverty and unemployment. With the country’s few natural resources and limited diversification potential, government authorities have engaged in negotiations with the IMF on a three-year programme intended to generate additional financial resources. In that framework, they have been making efforts to reduce public sector deficits and have announced a new structural reform programme.
The country’s internal and external accounts have remained structurally out of balance and financed by transfers linked to the presence of French and, since 2002, American military bases, as well as by grants and debt. Although the foreign debt burden contracted on concessional terms has been high, it has nonetheless been insufficient to qualify the country for admission to the HIPC programme. President Guelleh’s uncontested re-election in April 2005, after the opposition boycotted the vote, should not obscure the persistent social and political tensions. With its geostrategic importance, however, the country should continue to benefit from support from Western countries.
5
MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
1.9 1.8 -6.3 76 263 -187 -12.3 50 5.7
2.6 0.6 -9.4 83 287 -204 -14.3 56 6.1
3.5 2.0 -8.4 89 338 -249 -15.2 63 5.2
3.2 2.8 -7.5 90 373 -283 -19.1 61 4.9
3.2 3.5 -9.7 116 413 -297 -18.8 72 4.5
1.9 1.8 -6.3 76 263 -187 -12.3 50 5.7
2.4
2.4
2.8
2.4
2.4
2.4
e = estimate, f = forecast
379
SUB-SAHARAN AFRICA
Eritrea Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
4.4 751 171
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT The economic situation has remained shaky amid the drought’s impact on farm production and the restrictions on imports. Additionally, very inadequate investment in relation to the country’s infrastructure needs has been limiting growth. In that context, the country has been running large deficits with unsustainable debt levels. The twin burdens of military spending and state-owned companies have affected public sector accounts most. External accounts, characterized by a very narrow export base, have remained in deficit and have not allowed the country to generate the foreign currency necessary to cover hydrocarbon, capital goods and food goods purchases.
Although international aid has, thus, continued to cover the country’s financing needs, it has remained limited. With government authorities not ready to submit to IMF conditions, the country has not been able to benefit from the HIPC programme. Moreover, its already strained relations with Western countries could deteriorate further in the wake of the decisions taken by government authorities in autumn 2005 to limit the actions of UN personnel responsible for monitoring the border with Ethiopia and then to expel part of the contingent. The heightened tensions between the two countries in 2005 have raised fears within the international community of renewal of the war that raged from 1998 to 2000.
MAIN ECONOMIC INDICATORS
380
US$ millions
2000
2001
2002
2003
2004
2005(3)
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
-13.1 19.9 -60.8 31 422 -391 -27.1 51 3.8
9.2 14.6 -53.8 26 393 -368 -16.5 77 7.6
0.7 16.9 -42.4 46 400 -355 -15.0 80 15.1
3.0 22.7 -34.8 12 456 -444 -36.5 105 29.7
1.8 21.5 -46.2 13 426 -413 -33.9 99 30.3
2.0 20.5 -33.9 15 370 -355 -23.6 85 37.6
0.8
1.1
0.7
0.3
0.3
0.3
e = estimate, f = forecast
ETHIOPIA
Ethiopia Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
68.6 6,652 97
Short-term: C
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT In 2005, good weather conditions underpinned economic growth driven by farm production and exports (45 per cent of GDP). Although satisfactory, the level of growth has not been nearly enough to reduce still widespread poverty. Reforms undertaken to improve that crucial sector’s productivity should consolidate growth in 2006, barring a natural catastrophe. In the longer term, structural reforms being implemented under a sustainable development programme introduced by government authorities in 2002 should reduce the economy’s vulnerability. In the short term, however, the currently good economic conditions will not suffice to eliminate internal deficits or external deficits exacerbated, moreover, by rising import costs (oil products, steel). To meet its financing needs, the country still
depends on international financial community backing, which resulted in substantial cancellation of its foreign debt in 2004 under the HIPC programme and in other substantial aid flows. Troubling political developments could, however, jeopardize the level of support received. Domestically, a spectacular surge by the opposition marked the May 2005 legislative elections with its representation in parliament increasing from 12 to 170 seats (out of 527). Those results have been disputed, however, and have given rise to severely repressed rioting. Externally, the demarcation of the Eritrea border, as decided by an arbitration commission in 2002 and partially refused by Ethiopia, is still pending, heightening tensions between the two countries in 2005 and raising fears in the international community of renewal of the war that raged from 1998 to 2000.
5
MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2005(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
7.7 -5.2 -9.6 441 1,556 -1,115 -9.7 89.5 16.6
1.2 -7.2 -14.0 452 1,696 -1,244 -12.9 103.4 12.5
-3.9 15.1 -17.7 483 1,940 -1,457 -12.8 103.5 14.8
11.6 9.6 -12.6 552 2,415 -1,863 -13.0 72.8 11.2
5.7 7.5 -10.5 609 2,394 -1,785 -12.6 72.1 3.9
5.6 4.8 -10.5 645 2,477 -1,832 -12.1 73.2 5.1
2.0
3.8
4.5
5.1
4.9
4.5
e = estimate, f = forecast
381
SUB-SAHARAN AFRICA
Gabon Population (million inhabitants) GDP (US$ million)
1.3 6,057
Short-term: B
Coface analysis
Medium-term: High risk
STRENGTHS ● Hydroelectric, forestry and tourist potential, as well as substantial mineral resources (notably iron and manganese), will spur diversification of the economy beyond oil. ● Those resources and the country’s political stability are attractive assets for investors. ● Efforts have been made to speed up structural reforms and foster local processing of domestic production.
RISK ASSESSMENT Although economic growth has tended to accelerate, its pace has remained too low in relation to the population’s needs. The oil sector’s steady performance has been the growth driver, benefiting from exploitation of marginal fields made possible by the high price levels. The non-oil sector’s dynamism has also made a positive contribution. Further out, however, investments in progress in the mining sector and transport infrastructure should spur the growth rate. Meanwhile, the country has benefited from the financial ease deriving from the high oil and manganese prices. The internal and external
382
WEAKNESSES Although oil production is supposed to decline in the medium term, the economy is still dependent on revenues from the sector, which represents 54 per cent of tax revenues and 80 per cent of export earnings. ● Despite the oil revenues, a difficult financial situation has contributed to deterioration of infrastructure. ● High factor-of-production costs and the business environment have hampered development. ● With the country ineligible for the HIPC programme, foreign debt has remained high despite the succession of debt arrangements implemented. ●
surpluses the country has been running have allowed it to settle arrears on public sector domestic debt. Moreover, in the framework of a 14-month programme agreed with the IMF in 2004, which should be extended via a triennial programme to be concluded in 2006, public sector financial management has been tightened and the structural reform process accelerated. That agreement paved the way for new foreign debt rescheduling by the Paris Club. The November presidential elections, when the outgoing president was re-elected with 79 per cent of the votes, confirmed the country’s political stability.
GABON MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
2.0 2.1 3.2 2,574 835 1,740 10.5 82.6 26.5
0.0 0.2 3.4 2,848 1,042 1,806 5.2 87.4 20.9
2.4 2.1 7.4 3,556 1,167 2,390 6.7 71.0 16.0
1.4 0.5 7.4 4,661 1,500 3,161 12.6 63.5 14.5
2.1 1.5 10.7 4,889 1,489 3,401 13.8 56.1 12.0
2.3 1.6 9.4 4,586 1,528 3,058 9.3 60.3 12.8
0.1
0.6
0.7
0.6
1.7
2.5
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview The Gabonese market is very open. The country’s tariff system is common and consists of the common external tariff (CET) and the internal and external generalized preferential tariff (GPT) of the Economic and Monetary Community of Central Africa (CEMAC). In theory there is duty-free admission for goods from other CEMAC countries but, in practice, the system does not work too well. A number of tariff and non-tariff barriers remain, including double duties on products imported from third countries; poor application of CEMAC rules of origin; conditional, exceptional or discretionary exemptions etc. Duties range from 0 per cent for some products such as medical equipment and stationery, 6 per cent for basic staples, 11 per cent for commodities and capital goods and 21 per cent for semi-finished goods, to 31 per cent for consumer goods. The most strongly recommended means of payment is the irrevocable and confirmed letter of credit. Documentary collection upon presentation of a complete set of bills of lading and bills of exchange should be used only if the customer is well known to the exporter. Bank transfers and cheques, for which the customer incurs no liability, should be avoided. Exporters should be cautious when dealing with government agencies. For all public sector orders, it is
■
necessary to obtain a copy of the official purchase order issued by the Budget Expenditure Office at the Ministry of Finance. Contracts and orders placed by the government with a foreign supplier must be countersigned by the Director General of Public Accounts. Suppliers are advised to check the relevant tax clauses with the departments concerned. Attitude towards foreign investors The legislative and regulatory environment is extremely liberal and the attitude of government officials generally positive. Investors have access to free trade through CEMAC, modern instruments of business law through the Organization for the Harmonization of Business Law in Africa (OHADA), investment safeguards through the World Bank’s Multilateral Investment Guarantee Agency (MIGA) and a guaranteed appeals procedure through the International Centre for the Settlement of International Disputes (ICSID). However, the judicial process remains lengthy and court judgments are often arbitrary, as revealed in the reports drawn up by CIAN (Conseil Français des Investisseurs en Afrique) in 2004 and by the Foreign Investment Advisory Service (FIAS). The country’s Investment Charter provides for freedom of enterprise, the right to property (including intellectual property), unrestricted access to foreign currency, free movement of capital etc. From time to time it is supplemented with
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5
383
SUB-SAHARAN AFRICA
384
opportunities. Libreville, too, offers real comparative advantages for the development of services on a regional scale, especially as a site for the regional headquarters of international companies. The government has commissioned FIAS to carry out a study of the investment climate in the country. The study, along with an action plan, should receive the government’s blessing by the year-end. PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 450 400
WORLD Gabon
350 300 250 200 150 100 50
5
4
ec
-0
04 D
-0 ec
ne Ju
3
04
-0 ec
ne
D
Ju
D
03
2 ec D
Ju
ne
-0
02
1 ec D
Ju
ne
-0
01
0 ec D
Ju
ne
-0
00
9 ec D
Ju
ne
-9
99
8 ec D
Ju
ne
-9
98
Ju
ne
-9 ec D
ne
97
7
0
Ju
special laws (Forestry Act 2001, Investment Act, Mining Act, Oil Act, Labour Act, Competition Act). Recently the government set up a Competition Directorate and a National Commission Against Illicit Gain at the Ministry of Commerce and strengthened the Public Procurement Directorate. In 2004, Gabon joined the Extractive Industries Transparency Initiative. There is also the Private Investment Promotion Agency (APIP), which acts as a one-stop shop and provides investors with practical information. The services provided by this agency are steadily improving, especially as regards the time required to obtain administrative documents. Customs duties and VAT are negotiable for large industrial schemes. New VAT-related tax provisions were introduced in summer 2004 (see the economic mission website: www.missioneco.org/gabon). Wood processing, following the adoption of the new Forestry Act, offers interesting investment
GABON OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 39 ■ Public consumption 7 ■ Investment 17
Exports: 62% of GDP
Imports: 41% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
800 700 600 500 400 300 200 100 0
2000 1500 1000 500 0 USA
France
China
Japan
France
Trinidad and Tobago
USA
UK Netherlands Cameroon
IMPORTS by products ■ All food items 19% ■ Basic metals 6% ■ Machinery 20% ■ Electrical equipment 8% ■ Transport equipment 8% ■ Consumer goods 16% ■ Miscellaneous 22%
EXPORTS by products ■ Petroleum 81% ■ Manganese 6% ■ Wood 12% ■ Miscellaneous 1%
5
STANDARD OF LIVING / PURCHASING POWER Indicators
Gabon
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
5,500 3,340 0.635 n/a 84 40.4 29 22.4
Regional average DC average 1,750 500 0.481 36 36 44 11 12
4,300 1,280 0.697 33 43 31 112 28.4
385
SUB-SAHARAN AFRICA
Ghana Population (million inhabitants) GDP (US$ million)
20.7 7,624
Short-term: C
Coface analysis
Medium-term: High risk
STRENGTHS ● Ghana has been the second largest world cocoa producer and tenth largest gold producer. ● The progress made on structural reforms will be conducive to diversifying the productive fabric and has earned international community backing for the country. ● That backing resulted in cancellation of public sector foreign debt under the HIPC programme (completion point in 2004). ● Its political stability and the role it has been playing in regional organizations (ECOWAS, AU) have conferred a positive image on the country.
RISK ASSESSMENT With production starting on new gold deposits and a record cocoa harvest in 2005, economic activity has been registering positive performance. The expansion of services and increased spending on social programmes and government infrastructure should continue to fuel growth in 2006. Easing inflationary pressures, allowing the central bank to relax monetary policy, should also benefit the economy. Those good conditions, in conjunction with tight management, have facilitated the consolidation of public sector finances. However, the growth dynamism has also generated an influx of imports of
386
WEAKNESSES Two products, cocoa and gold, have generated nearly 70 per cent of the country’s export earnings, making it vulnerable to price trend reversals. ● Despite reduction of foreign debt, the country’s financing needs have remained substantial and kept it dependent on international aid. ● A low national savings rate has hampered private sector development. ● Combating poverty, unemployment and underemployment, and improving access to education and healthcare have weighed on public sector policies. ●
durable and consumer goods that has been widening the trade deficit. Moreover, repatriation of mining company profits has enlarged the current account deficit. Although the cancellation of public sector foreign debt has been progressively reducing the country’s financing needs, that trend has sustained its dependence on international aid. Ghana’s political stability has facilitated implementation of reforms intended to develop a business environment more hospitable to the private sector even if progress on the liberalization programme (water, electricity and oil products) has been subject to repeated delays.
GHANA MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
4.2 32.9 -14.6 1,867 2,831 -964 -10.3 132.3 12.0
4.5 14.8 -8.1 2,057 2,714 -657 -3.1 125.5 10.8
5.2 26.7 -8.0 2,471 3,258 -787 -3.5 111.5 8.2
5.5 12.6 -9.5 2,785 4,297 -1,512 -8.8 77.5 2.7
6.0 14.3 -7.3 2,929 4,696 -1,767 -9.8 65.9 2.2
5.6 8.7 -6.2 3,067 4,968 1,901 -10.0 60.2 2.2
1.1
2.1
4.1
3.9
3.6
3.9
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview There are no import licences or foreign exchange controls. The country has comprehensive copyright protection laws, although these are not properly enforced. Industrial property is better protected. Trademarks and company logos receive proper and adequate protection, provided they have been registered beforehand. Customs duties vary between 0 and 25 per cent. Some products from the Economic Community of West African States (ECOWAS) are exempt from customs duty. Ghana levies 0.5 per cent tax on products from non-ECOWAS countries. A 0.5 per cent tax has also been introduced to provision the Export Development Investment Fund (EDIF). Since 1 April 2000, goods inspections at the point of entry have been carried out by GSBV (a Bureau Véritas/Ghana Standards Board joint venture) and by Gateway Services Limited (GSL – a Cotecna/Ghanian Customs joint venture). GSBV inspects goods at airports and border crossings, whereas GSL conducts inspections at the ports of Tema and Takoradi.
■
VAT is applicable at a flat rate of 12.5 per cent on the customs value of goods, on top of customs duties and levies. Since 1 August 2004, a 2.5 per cent national health tax has applied, like VAT, to all imported goods and services. It is levied by the tax department responsible for VAT collection. Foreign companies, however, face a number of difficulties: a stifling and omnipresent bureaucracy; a legal and judicial system which, though ostensibly adequate for the job, is both arbitrary and prone to outside interference; and poor financing (the banking sector is not interested in industrial and business investment).
5
Attitude towards foreign investors To set up a joint venture with a local partner, a minimum investment of US$10,000 is required. The equity requirement is five times higher for wholly foreign-owned companies. Purchasing and sales groups are required to invest a minimum of US$300,000 and employ at least ten local staff. These conditions do not apply to investment and fund management firms or to companies exporting Ghanian products.
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387
SUB-SAHARAN AFRICA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 51 ■ Public consumption 8 ■ Investment 15
Exports: 40% of GDP
Imports: 52% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
250
500
200
400
150
300
100
200
50
100
0
0 Netherlands
UK
France Germany
Nigeria
Japan
China
UK
USA
Germany
IMPORTS by products ■ Capital goods and transport equipment 34% ■ All food items 11% ■ Chemical products 11% ■ Other manufactured goods 22% ■ Miscellaneous 22%
EXPORTS by products ■ Gold 35% ■ Cocoa beans 29% ■ Cocoa products 5% ■ Wood 7% ■ Miscellaneous 22%
STANDARD OF LIVING / PURCHASING POWER
388
Indicators
Ghana
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
2,190 320 0.520 30 37 41.9 13 3.8
Regional average DC average 1,750 500 0.481 36 36 44 11 12
4,300 1,280 0.697 33 43 31 112 28.4
GUINEA
Guinea Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
7.9 3,630 460
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT Despite substantial potential in mining (with onethird of world bauxite reserves, iron, gold and diamonds), hydroelectricity and farming, the economy has continued to suffer from stagnation accompanied by strong inflationary pressures. Deficient infrastructure and an unstable political and social climate have shrouded the outlook for 2006 in uncertainty. Developing this potential, with resulting positive effects on growth and poverty reduction, will necessitate structural reforms. However, questions about the possible succession of President Conté and the government’s limited room
for manoeuvre have raised doubts about pursuit of those reforms over the long haul. Consolidation of public finances, burdened by substantial debt, has thus been in jeopardy, as have continuation of the IMF agreements and the possibility of foreign debt cancellations. That debt has been substantial, however, with payment often made in an irregular manner. Meanwhile, with the domestic situation remaining shaky, a still very unstable regional environment (Liberia, Sierra Leone, Ivory Coast) has been an additional risk factor amid the population displacements and smuggling it engenders (arms, cocoa from Ivory Coast and so on).
5
MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
4.0 5.4 -7.5 723 562 161 -4.8 109 20.7
4.2 3.0 -6.2 709 596 112 -5.6 102 19.0
1.2 12.9 -8.8 727 578 148 -4.0 95 23.5
2.7 17.5 -5.9 733 569 164 -4.2 83 25.0
2.0 35.0 -1.7 774 577 198 -2.9 92 21.5
2.0 30.0 -1.5 847 647 199 -2.7 84 19.8
2.6
2.1
1.8
1.1
1.5
2.9
e = estimate, f = forecast
389
SUB-SAHARAN AFRICA
Ivory Coast Population (million inhabitants) GDP (US$ million)
16.8 13,734
Short-term: D
Coface analysis
Medium-term: Very high risk
STRENGTHS ● With its agricultural and mineral resources, significant industrial fabric and quality services sector, the country’s economic potential is substantial. ● Ivory Coast is the world-leading producer of cocoa, which generates ample fiscal revenues. ● Membership in WAEMU, the West African Economic and Monetary Union, continues to be a factor of monetary stability despite the troubled times the country has been undergoing.
RISK ASSESSMENT Despite the efforts of the international community and African countries to put an end to the grave political crisis buffeting the country, and to its de facto partition since September 2002, the situation has remained deadlocked. The opportunities created by South African mediation that produced the Pretoria accords in spring 2005 have gone nowhere. Although the laws stipulated by those agreements have been duly adopted, the opposition has contested their formulation and the process of disarming the militias has not begun. In this context, the presidential election scheduled end-October 2005 could not be held. To avoid a legal vacuum, the UN and the African Union extended President Gbagbo’s term in office while
390
WEAKNESSES The political crisis buffeting the country could, in the long term, undermine its regional role (finance, transit, trade hub). ● That crisis has caused living conditions and infrastructure to deteriorate, with an expanded informal economy impeding a revival of the real economy. ● With its relations with financial backers suspended, the country cannot benefit from debt reduction arrangements for which it could otherwise qualify, and the arrears have been piling up. ●
imposing a consensus prime minister on him, endowed with broad powers to prepare the October 2006 elections. The legal and political room for manoeuvre of the new prime minister, Mr Konan Banny, governor of the BCEAO (Central Bank of West African States), appointed in December 2005, will be uncertain, however, and will depend on the goodwill exercised by the various protagonists on the political scene. In that context, while the cocoa sector allowed the country to avoid economic collapse, the prospects for recovery will depend on political developments, which will, in turn, condition the regularization of the country’s situation with financial backers and the return of the capital needed to finance investments.
IVORY COAST MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
0.1 4.4 0.4 3,722 2,271 1,451 -3.9 119 32.1
-1.6 3.1 -2.0 5,694 2,610 3,084 6.5 111 25.7
-3.8 3.3 -3.2 5,844 3,150 2,694 3.8 106 25.5
0.5 1.7 -4.4 5,625 4,485 1,140 -4.6 100 27.7
0.8 4.0 -5.2 6,416 4,692 1,724 -1.9 94 21.2
1.2 4.5 -6.0 6,421 4,297 2,124 1.5 87 19.5
2.7
3.9
4.1
3.4
1.6
n/a
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Means of entry Since 1 January 2000, the date of introduction of the common external tariff, all WAEMU countries have identical customs procedures. Imports from member states are totally exempt from customs duties, while those from third countries are liable to four rates of duty (0, 5, 10 and 20 per cent). There is also a statistical tax (1 per cent of the CIF value), a community solidarity tax (1 per cent), an ECOWAS community levy (0.5 per cent) and 18 per cent flat-rate VAT. Special taxes are applied on an ad hoc basis to a number of products, including fish, rice, alcoholic beverages, tobacco, cigarettes and petroleum products, while a limited number of products are liable to temporary sliding-scale duties that vary between 2.5 per cent (lower band) and 5 per cent (upper band). Protectionist measures include an import licence for cotton and 100 per cent cotton products (eg wax and bazin) as well as oil and gas. Sugar imports, moreover, are subject to the issue of an importer code. Products are quantity- and quality-controlled by Bivac and Cotecna prior to shipment. Under an order in council dated 2 April 2002, a certificate of conformity has been required since 2 June 2003 to commercialize 80 or so products. Nevertheless, conformity checks have been temporarily
■
suspended by the Ministry of Industry and Private Sector Development. With regard to exchange controls, the flow of capital between the Ivory Coast and non-ECOWAS member states (excluding France) is subject to the approval of the Ministry of Economic Affairs and Finance (Finex Department) for sums equal to or greater than FCFA300,000 (€458). There are no restrictions on the movement of capital between Ivory Coast, other member countries and France.
5
Attitude towards foreign investors The current Investment Act, in force since 1995, provides for two mechanisms that grant five- or eightyear tax exemptions, depending on the size and type of investment. Under the approval mechanism (investment €762 000), investors are liable to 5 per cent flat-rate import duty on machinery, equipment and the first batch of spares. The Act does not differentiate between origin of investment and applies to both local and foreign investment. However, legal uncertainty and the social and political crisis that has gripped the country since 2002 are a cause for concern to business. There are no special restrictions on the employment of foreign workers. To be hired though, a vacancy must be advertised for one month and permission obtained from the Ministry of Labour.
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391
SUB-SAHARAN AFRICA PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 500 450
WORLD Ivory Coast
400 350 300 250 200 150 100 50
392
5
4
D
ec
-0
04
-0 ec
ne
D
Ju
3
04
-0
ne
ec D
Ju
2
03
-0 ec
ne
D
Ju
1
02
-0
ne
ec D
Ju
0
01
-0 ec
ne
D
Ju
9
00
-9
ne
ec D
ne Ju
Ju
8
99
98
-9 ec D
ne Ju
ec D
Ju
ne
97
-9 7
0
IVORY COAST OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 51 ■ Public consumption 6 ■ Investment 7
Exports: 47% of GDP
Imports: 34% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
1200
1200
1000
1000
800
800
600
600
400
400
200
200
0
0 France Netherlands USA
Spain
France
Italy
Nigeria
UK
China
USA
IMPORTS by products ■ All food items 22% ■ Fuel 17% ■ Chemical products 14% ■ Other manufactured products 13% ■ Capital good and transport equipment 21% ■ Miscellaneous 13%
EXPORTS by products ■ Cocoa 56% ■ Agricultural raw material 9% ■ Fuel 13% ■ Other manufactured products 10% ■ Capital good and transport equipment 10% ■ Miscellaneous 2%
5
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
Ivory Coast 1,400 660 0.42 34 45 41.5 14 9.3
Regional average DC average 1,750 500 0.481 36 36 44 11 12
4,300 1,280 0.697 33 43 31 112 28.4
393
SUB-SAHARAN AFRICA
Kenya Population (million inhabitants) GDP (US$ million)
31.9 14,376
Short-term: C
Coface analysis
Medium-term: High risk
STRENGTHS ● Kenya’s economy is relatively diversified. ● Its political and economic importance in East Africa, consolidated by the strengthening of regional integration within the East African Community, represents a major asset. ● Paris Club debt rescheduling has bolstered the external financial situation.
RISK ASSESSMENT In 2005, a farm production rebound accompanied the dynamism of the tourism, manufacturing, services and construction sectors. That growth should continue in 2006 with even more marked expansion of public and private investment. A new privatization law has been spurring private sector investment since its approval by parliament in August 2005. Rising oil prices, meanwhile, have been stoking inflation. Firm economic conditions and a reorganization of tax services have facilitated fiscal deficit reduction. However, export and tourism-revenue growth has not sufficed to offset increased capital goods imports
394
WEAKNESSES The economy has remained sensitive to weather conditions. ● Deficient transport and energy-supply infrastructure, together with a business environment marked by persistent corruption, have affected economic potential. ● The substantial burden of public sector wages and domestic debt has been straining public finances. ● Combating poverty, unemployment and the AIDS pandemic has been a major challenge. ●
and rising oil prices, which have widened external account deficits. Covering the country’s financing needs has depended on international community backing, renewed end-2003 with the signing of a new three-year IMF agreement. The evolving situation could, however, jeopardize that agreement. The failure of the November 2005 referendum on the proposed new constitution split the majority, in power since 2002, and weakened President Kibaki. The already slow pace of reforms and the campaign against corruption, often criticized by donor countries, could slow even more, especially in the run-up to the next elections, scheduled for 2007.
KENYA MAIN ECONOMIC INDICATORS US$ millions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
2001
2002
2003
2004
2005(e)
2006(f )
1.1 5.7 -3.1 1,891 3,238 -1,347 -2.6 42.7 12.8
1.5 6.6 -5.4 2,163 3,215 -1,052 -1.5 46.3 15.3
2.8 8.2 -1.7 2,412 3,159 -747 -3.1 45.0 12.9
4.3 11.7 -4.1 2,723 3,555 -832 -2.4 43.5 10.5
5.0 10.5 -3.4 3,257 4,320 -1,063 -6.5 41.8 8.0
5.3 7.0 -1.9 3,627 6,078 -2,451 -5.5 43.8 7.4
3.3
3.7
4.5
4.0
4.4
3.7
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview Kenya has a free market economy, which is open to investment and imports of capital and consumer goods complying with the country’s standards. Only products such as arms, pesticides, animal and plant seed are prohibited or restricted. Kenya’s animal health authorities react quickly to warnings issued by WHO, as in the case of Newcastle disease. Protectionist measures limit access by foreigners to land ownership and investment management or reinsurance activities, while slowing down the liberalization of the public sector. There are also tariff barriers in the form of temporary surcharges designed to protect local industry and agriculture (vehicle assembly; production of rice, maize, sugar, wheat, milk or natural cotton fibre). These vary between 20 and 60 per cent. As well as reduced import duty on products processed locally, there are tax exemptions for export industries based in the free zones. The structure of customs duties has been gradually simplified to facilitate assessment and collection. The Common External Tariff of the EAC (Tanzania, Uganda, Kenya) has applied to Kenya since 1 January 2005. Tariffs vary between 0.10 and 25 per cent according to the level of a product’s processing. The standard rate of VAT is 16 per cent (as of July 2003). Since September 2005, pre-shipment inspections to check the compliance of products
■
exported to Kenya are in place. Two firms – Interteck and SGS – have been appointed to carry out such inspections. Each deals with a different set of countries across the world. Ad hoc duties apply to imports of crude oil and refined petroleum products. Means of entry The US dollar and the pound sterling are the traditional units of account, although the euro has rapidly gained ground as the EU becomes the country’s largest trading partner and biggest lender. Certain formalities, such as pre-shipment inspection of goods imported into Kenya, must be complied with. Exporters should also note that administrative procedures are cumbersome and the Kenyan administration finicky. In any case, it is advisable to take certain precautions with regard to payments and to use tested procedures, such as presentation of documents against payment, guaranteed bank cheques, international transfers and confirmed letters of credit.
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Attitude towards foreign investors The Kenyan government is looking to attract new investment in order to meet its target of creating 500,000 new jobs a year. Foreign investment is welcomed by the government, especially where it helps promote exports, technology transfer and jobs. There is no one-stop shop for foreign investors. However, reforms in investment promotion legislation are under way to remedy this
5
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395
SUB-SAHARAN AFRICA situation and facilitate foreign investor access by next year. It should also be noted that Kenya’s road and rail infrastructure is in very poor order but undergoing modernization and privatization. Growth sectors include agriculture (horticulture),
telecommunications, energy and utilities under privatization (roads, water, electricity supply, railways, port facilities). Work permits remain hard to obtain. Other than ad hoc decisions to limit access to specific activities (gaming, hunting etc), there are few restrictive or discriminatory regulations.
OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 57 ■ Public consumption 14 ■ Investment 10
Exports: 25% of GDP
Imports: 29% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
350
600
300
500
250
400
200
300
150
200
100
100
50 0
0 Uganda
UK
UAE
USA Netherlands Pakistan
Saudi Arabia
South Africa
UK
China
IMPORTS by products ■ All food items 12% ■ Fuels 23% ■ Chemical products 15% ■ Other manufactured goods 19% ■ Capital goods and transport equipment 27% ■ Miscellaneous 4%
EXPORTS by products ■ All food items 42% ■ Agricultural raw materials 11% ■ Fuels 19% ■ Other manufactured goods 16% ■ Chemical products 5% ■ Miscellaneous 7%
STANDARD OF LIVING / PURCHASING POWER
396
Indicators
Kenya
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
1,030 400 0.474 33.9 36 42.1 10 6.4
Regional average DC average 1,750 500 0.481 36 36 44 11 12
4,300 1,280 0.697 33 43 31 112 28.4
MADAGASCAR
Madagascar Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
16.9 5,474 324
Short-term: C
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT After the 2001–2002 crisis triggered by protests over the presidential election results, the ensuing political stabilization allowed the country to revive economic activity and achieve high growth rates, accompanied, however, by an upsurge of inflation. Although forecasts for 2006 call for continued growth, it will remain vulnerable to exogenous factors, particularly weather conditions. Madagascar needs to continue its efforts to diversify the economy, improve the business environment and develop infrastructure; the outlook for the textile sector, Madagascar’s main diversification focus until now, is uncertain.
Moreover, public sector accounts have continued to show large deficits reflecting the narrowness of the country’s tax base, and the deficit reduction objective may not be reached. Large external account imbalances have also persisted, keeping the country and government dependent on international aid. However, a further reduction of the foreign tax burden appears likely under the HIPC programme. The substantial financial support provided by the international community should allow the country to get through a difficult period marked by renewed social and political tensions, with presidential elections looming in November 2006.
5
MAIN ECONOMIC INDICATORS US$ millions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
2001
2002
2003(e) 2004
2005(e)
2006(f )
6.0 7.0 -8.2 965 950 15 -2.0 104 10.7
-12.7 16.3 -8.4 486 603 -118 -6.1 111 20.5
9.8 -1.7 -9.3 941 1,131 -190 -7.5 89 12.5
5.3 13.8 -13.1 976 1,434 -458 -14.4 68 5.7
5.0 16.1 -9.3 1,013 1,470 -457 -11.3 72 6.0
5.9 4.8 -8.7 1,046 1,500 -454 -9.4 73 7.2
3.1
3.8
2.6
2.7
2.6
2.8
e = estimate, f = forecast
397
SUB-SAHARAN AFRICA
Malawi Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
11.0 1,714 156
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT A poor and landlocked country, Malawi’s economy has been vulnerable to developments in the farm sector (tobacco, tea), on which it is highly dependent and which has generated a structural external account imbalance. The 2005 drought led to a marked growth slowdown, accompanied by a new surge of prices. Subject to better precipitation, business activity could recover in 2006, although at a pace still not sufficing to significantly reduce poverty. With their efforts to consolidate public sector finances and combat corruption, however, government authorities have earned international financial community backing. A three-year programme concluded with the IMF in August 2005 augurs cancellation of the country’s public sector foreign debt under the HIPC programme.
The current situation could nonetheless jeopardize that support. Public sector finances, strained by unsustainable domestic and foreign public debt, have been shaky. However, a narrow tax base and the drought’s impact on both revenues and spending will not allow a recovery to develop in the near term. Moreover, severe political tensions have caused a split in the majority party and the initiation of impeachment proceedings against President Mutharika. Even if the impeachment outcome may be uncertain, the incumbent president thus no longer enjoys a majority to back broad structural reform policy or the means needed to remedy the food and health crisis affecting a third of the population.
MAIN ECONOMIC INDICATORS
398
US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
-4.1 27.2 -14.8 427 585 -158 -12.5 160 22.3
2.1 14.9 -18.3 421 727 -306 -23.3 149 19.5
3.9 9.6 -20.0 441 792 -351 -16.9 146 17.7
4.6 11.5 -18.1 470 866 -396 -19.3 160 19.5
1.0 15.6 -20.2 363 645 -282 -20.2 152 22.2
2.7 9.5 -16.2 389 655 -266 -16.6 145 25.6
3.3
1.4
1.5
1.5
2.3
3.3
e = estimate, f = forecast
MALI
Mali Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
11.7 4,326 370
Short-term: B
Coface analysis
Medium-term: High risk
RISK ASSESSMENT Improved farm production, good cotton harvests and especially increased gold production, with new sites going into operation, fuelled economic recovery in 2005. The outlook for 2006 has remained bright although dependent on satisfactory precipitation. Although gold extraction should continue at a high level, the cotton sector’s difficulties could have a more adverse effect on growth. Despite notable fiscal discipline and higher taxes, public sector financial management has remained difficult with the tax base still narrow and several factors bloating spending: necessary investments (road network development among others), continuation of the hiring policy in social sectors, as well as cotton sector and oil product subsidies. The public sector deficit reduction target thus seems unrealistic.
Moreover, an unfavourable cotton price trend and rising oil prices have been undermining the trade balance with the services and revenues balance remaining in deficit. Even though the debt burden, already reduced under the HIPC programme, should be further reduced with the cancellation of some multilateral debt decided in June 2005, external financing needs have thus remained substantial. Enjoying good relations with donor countries, the country can nonetheless count on concessional loans and grants to meet those needs. A new slowdown in the pace of reforms in the run-up to the 2007 election year could, however, undermine those good relations. The reduced pace of privatization decided by the government to avoid exacerbating social tensions that had intensified in recent months constitutes a case in point.
5
MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
12.1 5.2 -7.0 714 724 -10 -12.5 96 15.9
4.3 5.0 -7.3 899 709 190 -4.3 105 5.7
7.4 -1.3 -5.7 953 966 -13 -6.9 82 5.3
2.2 -3.0 -7.1 1,089 1,095 -6 -6.4 74 6.2
6.0 3.0 -8.8 1,045 1,189 -144 -9.0 61 6.8
6.5 2.0 -7.1 1,174 1,240 -66 -7.6 55 5.5
3.2
5.4
7.0
7.0
6.6
6.1
e = estimate, f = forecast
399
SUB-SAHARAN AFRICA
Mauritania Population (million inhabitants) GDP (US$ million)
2.9 1,093
Short-term: C
Coface analysis
Medium-term: Very high risk
STRENGTHS ● The start of oil extraction in 2006 will mark a turning point for the economy. ● The country boasts substantial mineral resources including iron, copper and diamonds, which have attracted foreign investment. ● Implementation of structural reforms allowed the country to benefit from a substantial reduction of public sector foreign debt under the HIPC programme, after it reached the completion point in 2002.
RISK ASSESSMENT Growth remained at respectable levels in 2005, thanks notably to the steadiness of services and to mining sector investments. It will strengthen considerably in 2006 with oil and mineral deposits (gold, copper) going into production, To reduce poverty, however, continued efforts on reforms and greater diversification of the industrial fabric will have to accompany that growth. New revenues derived from oil will facilitate matters in consolidating public finances, which have deteriorated drastically since the serious imbalances registered in 2003 and 2004 and generated high inflation. Those revenues will also help to consolidate external accounts and increase
400
WEAKNESSES The agrarian economy has become all the more vulnerable with growing desertification – responsible for incompressible inflows of food imports – compounding the usual vagaries of weather and locust swarms. ● Public sector domestic debt, generated by the accumulation of public deficits, has weighed on the economy. ● With a small population (only 2.9 million inhabitants) and high poverty affecting 46 per cent of the population, the country has represented a limited market. ● Poverty and ethnic and regional divisions have led to social and political unrest. ●
foreign currency reserves. The foreign debt burden, already the subject of a range of measures in the past, should decline with cancellation of a larger proportion of it pending based on the June–July 2005 G8 decisions. Since the 3 August 2005 coup, apparently supported by the population, prospects for continued political and structural reforms have appeared good. However, continuation of those efforts over the long haul and the commitment to limiting the military transition to two years at most will be important factors in improving Mauritanian risk. In that regard, the effective holding of a constitutional referendum in summer 2006 will be crucial.
MAURITANIA MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
3.6 4.7 -6.5 339 372 -34 -6.5 234 28.6
2.3 3.9 3.8 330 409 -79 -1.1 203 8.1
6.4 5.5 -36.4 303 652 -349 -22.3 177 7.7
6.9 10.4 -23.0 408 786 -378 -27.9 161 7.0
5.4 14.2 -12.7 581 851 -270 -19.6 131 7.7
26.7 6.0 1.0 1,680 1,320 360 10.7 81 2.7
5.3
7.4
2.7
0.4
1.5
2.2
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET ■ Attitude towards foreign investors The country’s legal system is fairly comprehensive judging by the multitude of laws (Business Act, Investment Act, Tax Act etc) and the quality of their content. Real estate laws, however, can be somewhat vague in some cases. It is therefore important to check the authenticity of title deeds to land especially in urban and industrial areas, around airports and ports and alongside major roads. A foreign company can win an action against a local partner. It is even possible to win a suit against the government and have the ruling enforced. On the other hand, it can be difficult, even impossible, to enforce a ruling against influential local businesspersons. The country has a double taxation agreement, which has not given rise to any complaints so far. However, the relationship between parent and subsidiary companies should be re-examined. There are, it seems, cases of double taxation that could deter some investors. The financial system gives the greatest cause for concern. Mauritanian banks perform none of the functions normally expected of a banking system, such as savings collection, investment credit
provision and so on. Their main role is to serve a handful of interest groups as providers of foreign exchange. Economic players not linked to these groups have to turn to moneychangers, and so pay a surcharge, in order to meet their foreign currency requirements. As both businesses and individuals keep local currency cash savings at home or at the workplace, there is a flourishing parallel market. Since the demonetization of 1974-series banknotes on 1 December 2004, there is better interaction between the banking sector and the country’s economy. The governor of the Central Bank of Mauritania, appointed in July 2004 and confirmed after the coup d’etat of 3 August 2005, is making important changes, including greater transparency in the allocation of foreign exchange which, de facto, is primarily reserved for imports of basic staples and commodities. The next six months should see a rapid rise in the use of automated payment systems as the interbank electronic money public tender was assessed in October 2005. The year 2006 (during which oil production is due to come onstream) is likely to be pivotal, with the introduction of a new banking act that separates commercial from banking activities along the lines actively called for by the IMF.
5
401
SUB-SAHARAN AFRICA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 45 ■ Public consumption 11 ■ Investment 26
Exports: 37% of GDP
Imports: 75% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
80 70 60 50 40 30 20 10 0
200 150 100 50 0 Japan
France
France
Spain Germany Belgium
Spain
China Belgium Germany
IMPORTS by products ■ Petroleum products 15% ■ Miscellaneous 85%
EXPORTS by products ■ Iron/minerals 60% ■ Fishing 40%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
402
Mauritania 1,870 400 0.477 29.5 62 42.6 14 10.8
Regional average DC average 1,750 500 0.481 36 36 44 11 12
4,300 1,280 0.697 33 43 31 112 28.4
MAURITIUS
Mauritius Population (million inhabitants) GDP (US$ million)
1.2 5,224
Short-term: A3
Coface analysis
Medium-term: Quite low risk
STRENGTHS ● Political stability and institutional quality have facilitated development. ● With a high savings rate underpinning a healthy financial sector, Mauritius has been able to finance its development without recourse to foreign capital. ● Economic diversification has been progressing with development of high value-added sectors (new technologies, finance). ● Mauritius is among the most advanced African countries in GDP-per-capita and humandevelopment terms. ● It has enjoyed good relations with Western countries and its neighbours in the Indian Ocean region. RISK ASSESSMENT Economic activity sagged in 2005 amid a drop in sugar production and the decline of textile exports from the export processing zone. The good performance of tourism and especially of financial, computer and telecommunications services nonetheless kept growth at satisfactory levels. However, the impact on employment of developments in the sugar and textiles sectors in conjunction with the upward trend of oil-product prices could impede economic activity in 2006. The financial situation of some companies deteriorated slightly in that context as evidenced by the increase in the Coface payment incident index, which has nonetheless remained near the world average.
WEAKNESSES The sugar and textile sectors will have to undergo deep restructuring with the dismantlement of preferential trade agreements that have benefited them (the end of the multifibre arrangement since January 2005, completion of the European sugar-market reform by 2009–2010). ● The accumulation of deficits and the poor situation of some state-owned companies have led to high public sector debt (72 per cent of GDP end-2004). ● Rising unemployment could ultimately heighten social tensions. ●
In the longer term, reorganization of those sectors should allow the country to overcome those difficulties, which have been complicating matters in consolidating public sector finances at this juncture. Furthermore, with foreign currency earnings from service exports and tourism not sufficing to cover a widening trade deficit, a current account deficit has emerged. The country’s financing needs have nonetheless remained moderate and a low foreign debt level has afforded it ample room for manoeuvre. In any case, the new government under Labour Party leadership that emerged from the July 2005 elections – marked by a change of majorities – should continue to pursue strict economic policy.
5
403
SUB-SAHARAN AFRICA MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS Exports) Foreign exchange reserves (in months of imports)
6.0 4.4 -5.7 1,639 1,892 -253 3.4 45.8 14.9
2.5 6.3 -6.0 1,586 1,790 -204 5.6 47.1 12.9
2.9 5.1 -6.2 1,835 2,133 -298 1.7 42.3 12.4
4.2 4.1 -5.4 1,935 2,309 -375 1.3 37.6 9.9
3.2 5.2 -5.6 2,016 2,708 -692 -2.7 34.1 9.7
2.8 5.0 -6.9 1,845 2,618 -773 -2.1 31.6 9.6
5.0
6.8
7.6
8.0
6.5
5.9
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview Mauritius has been a full member of the WTO since the 1994 Marrakech Summit. It signed the New York Convention on International Arbitration in June 1996 and ratified it in October 2002. It has dismantled tariff barriers under a series of regional agreements (SADC, COMESA, IOC) and in 1998 introduced flat-rate VAT, which is currently fixed at 15 per cent. Import regulations. An import permit is required for a handful of products listed under three categories: prohibited goods (dangerous items such as arms and explosives, vehicle spare parts); supervised goods subject to government approval (foodstuffs, energy and pharmaceuticals); and unrestricted or formality-free goods. Tariff barriers. Adopted in 1994, the system of customs duties differentiates between exporting countries benefiting from a preferential tariff (EU, United States, COMESA, SADC) and the 25 or so countries that are subject to a general tariff. In April 2005, the government made the decision to turn Mauritius into a tax-free island over the next four years. This has resulted in the immediate suspension of customs duties on 1,850 tariff lines and cuts in duties on other products. Close to 80 per cent of products are now exempt from customs duty. The maximum customs tariff in Mauritius is currently 65 per cent.
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404
Excise duties are levied on four categories of imported and/or locally manufactured goods (alcoholic beverages, cigarettes, petrol and motor vehicles). For imported products they range from 15 to 400 per cent ad valorem, and for locally manufactured products (eg cigarettes) they can be as high as 255 per cent. Some goods (food staples and pharmaceuticals) and services (education, transport, electricity and water) are exempt from VAT. Non-tariff barriers. Import permits and price controls apply to staples, 30 of which are also subject to administered pricing or profit control. Dairy products and pharmaceuticals have just been added to this list. Government monopolies alone have the right to import so-called ‘strategic’ products. The two leading monopolies are the State Trading Corporation (STC), which imports almost all the rice ration (other types of rice may be imported freely), wheat flour, petroleum products and cement (up to 25 per cent of requirements); and the Agricultural Marketing Board (AMB), which holds an import monopoly for onions, garlic, potato seeds, saffron and cardamoms. In early 1998, AMB relinquished some of its monopoly powers, allowing approved private agents to import potatoes free from price controls subject to certain conditions. Attitude towards foreign investors While Mauritius has, over the years, sought to attract the largest possible number of foreign investors – one
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MAURITIUS just has to look at the numerous incentive schemes offered by the Board of Investment (a one-stop shop set up in 2001 for investments of €300,000 or more) and the investment protection agreements entered into with the country’s main trading partners – it remains very selective about FDI, ensuring that the funds are channelled only into certain sectors. The country’s laws and regulations reflect this will to direct FDI flows towards specific sectors.
Foreign exchange regulations The rate of exchange of the Mauritian rupee is set by the central bank against a basket of currencies. There are no longer any exchange controls in Mauritius. The Mauritian rupee is fully convertible against the main currencies and may be transferred without restriction upon the sender providing proof of origin of funds.
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PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
WORLD Mauritius
250
200
150
100
50
5
4
5
D
ec
-0
04
-0 ec
ne
D
Ju
3
04
-0
ne
ec D
Ju
2
03
-0 ec
ne
D
Ju
1
02
-0 ec
ne
D
Ju
0
01
-0
ne
ec D
Ju
9
00
-9 ec
ne
D
Ju
8
99 ne
D
Ju
ec
-9
98
-9
ne Ju
ec D
Ju
ne
97
7
0
405
SUB-SAHARAN AFRICA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 39 ■ Public consumption 8 ■ Investment 15
Exports: 60% of GDP
Imports: 57% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
600
300
500
250
400
200
300
150
200
100
100
50
0
0 UK
France
USA Madagascar
South Africa
Italy
France
China
India
Bahrain
IMPORTS by products ■ All food items 17% ■ Fuels 11% ■ Chemical products 8% ■ Other manufactured goods 38% ■ Capital goods and transport equipment 22% ■ Miscellaneous 3%
EXPORTS by products ■ All food items 25% ■ Other manufactured goods 68% ■ Miscellaneous 8%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
406
Mauritius 11,280 4,100 0.791 n/a 42 25.2 285 116.5
Regional average DC average 1,750 500 0.481 36 36 44 11 12
4,300 1,280 0.697 33 43 31 112 28.4
MOZAMBIQUE
Mozambique Population (million inhabitants) GDP (US$ million)
18.8 4,321
Short-term: B
Coface analysis
Medium-term: High risk
STRENGTHS ● The country benefits from agricultural and mineral potential that could provide a durable foundation for its development. ● Its political stability and implementation of structural reforms have attracted substantial FDI inflows. ● It enjoys good relations with South Africa and the international community. ● That backing paved the way to a reduction of Mozambique’s public sector foreign debt under the HIPC programme, with the completion point reached in 2002.
RISK ASSESSMENT As in past years, the country should post high growth in 2006, driven by the extractive and manufacturing sectors, which have benefited from major industrial projects. Farm sector growth for both food and export crops, buoyed by notable productivity gains, could suffer from the drought. Those results have not led to significant improvement in the country’s finances, still affected by large deficits. The public sector deficits reflect the relative inability of government authorities to collect sufficient tax revenues notwithstanding efforts to manage public finances in a more disciplined manner. Despite the upsurge of
WEAKNESSES The economic upturn has not resulted in a significant reduction of poverty. ● With agriculture still employing 80 per cent of the population, the economy has remained vulnerable to weather conditions. ● Poor infrastructure and governance problems have limited the country’s attractiveness. ● Economic development has been concentrated in the south, thus exacerbating regional disparities. ● The country has remained very dependent on international aid. ●
5
aluminium exports since 2003, external deficits have remained marked by the impact of imports needed to run industrial and mining projects. Moreover, although Mozambique has benefited from a substantial reduction of its public sector foreign debt, private debt has increased and the country has remained dependent on aid to cover its financing needs. In the longer term, political stability, consolidated by the December 2004 general elections, should permit the government to go further with structural reforms and keep the country attractive to foreign investors.
407
SUB-SAHARAN AFRICA MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
13.1 9.0 -21.4 703 1,063 -360 -26.1 121 24.7
8.2 16.8 -19.7 810 1,543 -733 -22.3 116 21.6
7.8 13.4 -15.5 1,044 1,741 -697 -19.9 105 23.3
7.2 12.6 -13.2 1,504 2,035 -531 -13.8 85 19.2
7.7 8.0 -15.0 1,713 2,353 -640 -14.0 67 17.8
7.4 7.3 -13.0 1,746 2,419 -673 -12.9 63 18.1
4.4
4.6
4.8
5.1
4.0
3.7
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview Customs duties currently range from 0 per cent for pharmaceuticals, 2.5 per cent for commodities, 5 per cent for capital goods and 7.5 per cent for semifinished goods to 25 per cent for luxury and similar products. Different rates of duty may apply to one and the same product category (eg vegetables and private vehicles). Duties on passenger cars, for instance, vary between 5 and 25 per cent. According to locally based foreign companies, the existence of a thriving parallel economy not subject to import duties, levies or VAT (17 per cent) hampers fair competition and exports of their products. Customs procedures are so long-winded and complex that it is essential to hire the services of a special Mozambican agent (despachante) as well as a shipping agent. For payments, other than credit from international lenders, the irrevocable and confirmed documentary letter of credit is strongly recommended. Even where central bank and Ministry of Finance approval is obtained, foreign capital can be repatriated only if the investment project has been authorized beforehand by the Investment Promotion Centre (CPI). Since 1998, customs management has been satisfactorily handled by Crown Agents of the UK and goods inspection by the UK firm Intertek Testing Services (ITS).
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408
Attitude towards foreign investors An Investment Promotion Centre (CPI) was set up to facilitate and coordinate the direct investment decision-making process. While there is no legal requirement to consult this body, foreign investors are strongly recommended to do so. The government guarantees legal certainty and protection of property and other rights. The Tax Benefits Act and industrial free zone regulations offer many FDI incentives. While the country’s legislation provides for the establishment of wholly foreign-owned businesses, joint ventures with local partners are encouraged by the government. Living conditions for expatriates are highly satisfactory in the capital and major towns, but hygiene remains a concern in some regions.
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Foreign exchange regulations An interbank currency market regulating purchases and sales of foreign currency is in place. This market is closed to everyone but the central bank and approved financial institutions. The value of the metical is determined daily on the basis of supply and demand. Foreigners are strongly advised to carry out all foreign exchange transactions via approved banks and moneychangers. Banks can carry out currency transactions up to the value of their hard currency holdings. There are no restrictions on capital transactions.
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MOZAMBIQUE OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 55 ■ Public consumption 8 ■ Investment 20
Exports: 23% of GDP
Imports: 39% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
300
500
250
400
200
300
150 200
100
100
50 0
0 Belgium
South Africa
Italy
Spain
South Africa
Germany
Australia
USA
Portugal
India
IMPORTS by products ■ Machinery and transport equipment 33% ■ Capital goods and transport equipment 27% ■ Fuels 22% ■ Textiles 10% ■ Metal products 9%
EXPORTS by products ■ Aluminium 77% ■ Agricultural raw material 14% ■ Electrical and electronic equipment 9%
5
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
Mozambique Regional average DC average 1,060 210 0.379 31.7 36 42.3 5 4.5
1,750 500 0.481 36 36 44 11 12
4,300 1,280 0.697 33 43 31 112 28.4
409
SUB-SAHARAN AFRICA
Namibia Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
2.0 4,271 2,136
Short-term: A3
Coface analysis
Medium-term: Quite low risk
RISK ASSESSMENT The steadiness of diamond extraction and zinc production allowed the country to sustain strong growth in 2005, offsetting the fishing sector’s difficulties. Although a recovery by that sector in 2006 could spur economic activity, rising oil prices and appreciation of the Namibian dollar, pegged to the South African rand, could conversely reduce the competitiveness of the country’s exports. The external financial situation will remain good. Revenues from services, notably tourism, have contributed to generation of current account surpluses with the country carrying little foreign debt. Efforts to consolidate public sector finances
have been under way since the recent imbalances that increased public domestic debt. The economic diversification process has continued, buoyed by foreign investments made in the communications, transport and energy sectors. Moreover, great political stability will ensure the longer-term development of a country endowed with abundant mineral resources, high quality infrastructure and noteworthy tourist potential. The land redistribution policy revitalized since 2004 will be unlikely to jeopardize that stability and should allow the country to cope with the challenges of combating poverty, unemployment and AIDS.
MAIN ECONOMIC INDICATORS
410
US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
2.4 9.3 -4.8 1,142 1,341 -199 0.8 26.1 4.0
2.5 11.3 -3.5 1,072 1,280 -208 3.8 25.4 5.0
3.7 7.2 -7.8 1,249 1,711 -462 4.0 17.5 2.7
4.2 5.5 -2.0 1,351 1,875 -524 5.6 17.6 3.0
4.2 2.7 -2.9 2,040 2,350 -310 9.7 23.2 3.3
5.0 4.3 -1.4 2,490 2,480 10 14.9 22.8 3.1
1.7
2.6
1.8
1.7
1.6
1.7
e = estimate, f = forecast
NIGER
Niger Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
11.8 2,731 231
Short-term: C
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT Landlocked and one of the world’s poorest countries, Niger has been particularly vulnerable to weather conditions. A precipitation shortfall and locust swarms in 2004 thus led to severe famine early 2005. The good harvests that followed in 2005 and increased investment in infrastructure (transport, education, health) nonetheless allowed the economy to resume strong growth, which should continue in 2006. Public sector deficits widened further due to those difficulties and the magnitude of the informal economy. Reducing those deficits will be a slow process despite the tight fiscal policy pursued under the new three-year programme concluded
with the IMF in January 2005. That programme should speed up structural reforms, which have been lagging in recent years. Meanwhile, the steadiness of uranium exports notwithstanding, external accounts have continued to deteriorate. The pending cancellation of multilateral debt may only provide temporary relief considering the country’s structurally high external financing needs. Niger should thus remain dependent on international aid to cover its deficits. President Tandja’s re-election in December 2004, with 65 per cent of the votes cast, consolidated the country’s political stability, which persistent social tensions, often spurred by arrears on wages, should not jeopardize.
5
MAIN ECONOMIC INDICATORS US$ millions Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2001
2002
2003
2004
2005(e)
2006(f )
7.1 4.0 -7.9 272 332 -59 -6.1 80 34.2
3.0 2.7 -7.7 279 371 -92 -7.8 83 34.9
5.3 -1.8 -7.5 335 469 -134 -7.6 77 27.2
0.0 0.4 -8.9 401 569 -168 -8.1 73 6.1
4.5 7.6 -9.2 441 683 -242 -8.5 68 5.5
4.2 0.3 -9.6 480 730 -250 -9.7 68 6.2
2.9
3.1
4.7
3.9
3.1
3.1
e = estimate, f = forecast
411
SUB-SAHARAN AFRICA
Nigeria Population (million inhabitants) GDP (US$ million)
136.5 58,390
Short-term: D
Coface analysis
Medium-term: Very high risk
STRENGTHS ● Nigeria boasts substantial hydrocarbon resources (oil, gas) and agricultural potential. ● It represents half the population of West Africa and has played a leading economic and political role both regionally and continentally. ● The acceleration of structural reforms (privatization, price liberalization, banking sector) should consolidate the economy. ● The Paris Club agreement on partial cancellation of bilateral debt and repayment of the balance has paved the way for continued development.
RISK ASSESSMENT Increased oil and gas extraction is still driving economic growth. The non-oil sector has been developing steadily with the notable recovery of farm production. Those good economic conditions, accompanied by inflationary pressures, should continue in 2006. Deficient infrastructure and decades of bad management of public services could limit the scope of improvement. The level of oil prices has contributed to a sharp improvement in external and public sector accounts that – outside oil revenues – has masked the country’s still considerable financing needs.
412
WEAKNESSES The great dependence on hydrocarbons – which represent 40 per cent of GDP, 84 per cent of currency earnings and 86 per cent of tax revenues while attracting the lion’s share of investments – reflects the economy’s insufficient diversification. ● The constitutional, political and social context has not facilitated implementation of the reforms demanded by financial backers. ● Severe internal tensions (notably between the north and the south), poverty and unemployment have tended to stoke ethnic and religious conflicts. ● Governance issues have tended to undermine investor interest. ●
That favourable context has facilitated a speed-up in implementing the structural reforms demanded by donor countries. Nigeria was thus able to negotiate a sharp reduction of its foreign debt with the Paris Club in October 2005. The pace of reforms, which have been meeting with strong opposition especially on liberalization of petrol prices, could slow, even stall, in the run-up to general elections in 2007. The political environment has remained affected by major governance issues, ethnic and religious tensions, and by the oil resource-sharing problem, with producing states in the south feeling short-changed.
NIGERIA MAIN ECONOMIC INDICATORS US$ billions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
3.1 18.8 -3.3 19.6 11.5 8.1 2.6 64.9 12.1
1.4 13.7 -4.2 17.7 13.6 4.0 -11.7 67.2 17.2
10.9 14.0 -1.3 27.3 17.2 10.1 -2.7 57.2 9.6
6.1 15.0 7.7 37.3 19.1 18.2 4.6 50.4 7.0
4.0 18.8 9.9 45.2 24.5 20.7 5.8 24.9 20.8
5.0 11.9 11.3 50.9 26.1 24.9 8.4 6.9 14.1
5.8
3.6
2.8
5.3
5.6
9.3
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview The country is a member of the WTO but does not fully observe its rules. There is a vast variety of imported goods, the customs duties on which range from 5 to 100 per cent of the CIF value. An import ban is in place for a growing number of products (currently around 40), including retreaded and second-hand tyres, second-hand clothes, cars over five years old, frozen foods, mineral water, pasta and biscuits. The Nigerian government has increased the number of protectionist measures in favour of local products, such as finished goods, but cut customs duties for raw materials and machinery. Manpower is fairly cheap. A skilled worker earns about €150 a month, whereas an English-speaking local secretary gets €245. Employees usually receive one month extra pay.
■
a list of priority investment sectors and incentives (financial, tax etc) offered to companies by the government. The repatriation of capital, dividends and profit is unrestricted though extremely slow. Nigeria encourages oil companies to expand their exploration and production activities (long-term target: 4 million barrels daily). Foreign exchange regulations The Central Bank of Nigeria (CBN) uses Dutch auctions to supply the local market with currency. Under this system, twice a week the CBN announces the volume of currency (US dollars) it is prepared to sell against nairas through their banks. Exporters are strongly advised to obtain payment for all orders before shipment either by irrevocable and confirmed letter of credit or in cash in a hard currency. French banks are no longer present in the country.
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5
Attitude towards foreign investors The Nigerian Investment Promotion Commission (NIPC), headquartered in Abuja, regularly publishes
■
413
SUB-SAHARAN AFRICA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 32 ■ Public consumption 16 ■ Investment 16
Exports: 50% of GDP
Imports: 41% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
10000
2500
8000
2000
6000
1500
4000
1000
2000
500 0
0 USA
India
Brazil
Spain
USA
France
UK
Germany China
Italy
IMPORTS by products ■ Manufactured goods 39% ■ Capital goods and transport equipment 26% ■ Chemical products 25% ■ All food items 10%
EXPORTS by products ■ Petroleum 91% ■ Natural gas 9%
STANDARD OF LIVING / PURCHASING POWER
414
Indicators
Nigeria
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
900 350 0.453 40.8 47 44.1 7 7.1
Regional average DC average 1,750 500 0.481 36 36 44 11 12
4,300 1,280 0.697 33 43 31 112 28.4
RWANDA
Rwanda Population (million inhabitants) GDP (US$ million) GDP per capita (US$
8.4 1,637 195
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT Despite progress made on structural reforms, economic activity has remained insufficient to improve living standards for the people. The economy rests on deficient infrastructure, a relatively unskilled workforce and an excessively low savings rate. In 2005, a farming recovery alone underpinned economic activity. In 2006, provided harvests are good, services and civil engineering will notably drive growth, whereas the manufacturing sector will continue to suffer from the irregularity of energy supplies and rising prices for oil products. Although benefiting from the HIPC initiative with the completion point reached in April 2005, the country’s financial situation has remained shaky and marked by large deficits. A narrow tax base and
the high level of spending on reconstruction and also on defence have not facilitated consolidation of public sector finances. External accounts, meanwhile, have suffered from the country’s landlocked status, high transport costs and a limited export base (coffee, tea, cassiterite). Aid from the international financial community has been essentially covering Rwanda’s financing needs. If the precarious environment in the Great Lake region suggested that the aid will continue, its level could nonetheless be reduced, should the economic policies be called into question or the internal political situation deteriorate. The tensions linked to the aftermath of the 1994 genocide have remained high and have not contributed to opening the regime.
5
MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
6.7 3.4 -9.5 94 238 -144 -15.9 79 12.8
9.4 2.0 -8.9 67 235 -167 -16.6 85 17.3
0.9 7.4 -10.3 63 244 -181 -19.2 93 16.4
4.0 12.0 -12.2 97 273 -176 -18.1 93 13.8
4.0 7.0 -12.4 99 364 -265 -22.0 74 10.8
4.3 4.0 -13.5 103 388 -285 -20.8 71 12.1
1.8
2.7
2.3
2.4
2.0
1.9
e = estimate, f = forecast
415
SUB-SAHARAN AFRICA
São Tomé and Principe Population (inhabitants) GDP (US$ million) GDP per capita (US$)
157,000 47 299
Short-term: C
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT The country’s medium-term outlook will depend on hydrocarbon sector development, which will increase its strategic interest. After awarding an initial exploration block in 2004, the government called for bids on five new blocks in May 2005, which generated initial signing bonuses. Similarly, parliament adopted a law in December 2004 guaranteeing the transparency of the future revenues from the sector. However, commercial exploitation of the fields will not begin before 2010 at the earliest. At this juncture, the country’s economic and financial situation has remained precarious. Although fishing and tourism are still the main
growth drivers, investments linked to the oil sector and increased public spending should spur a slight upturn in 2006. Public and external accounts will, moreover, continue to run high deficits financed by a level of debt that has become unsustainable and that has been a source of large payment arrears. Nonetheless, the three-year programme concluded with the IMF in August 2005 could lead to cancellation of public sector foreign debt in 2006 provided, however, the government continues its efforts to consolidate public finances and stateowned companies. Meanwhile, government instability, a climate of allegations of corruption and the May 2006 legislative election campaigns could delay those efforts.
MAIN ECONOMIC INDICATORS
416
US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
4.0 9.5 -58.4 4 24 -21 -63.2 591 42.1
4.1 9.2 -43.6 5 29 -23 -54 533 52.4
4.0 9.6 -49.5 6 33 -27 -54.5 492 49.5
3.8 12.8 -47.8 7 36 -30 -61.5 468 45.3
3.2 15.1 -47.8 7 38 -31 -60.3 426 29.9
4.5 13.4 -43.8 7 41 -33 -60.3 337 25.6
3.9
4.1
4.9
3.3
3.6
3.2
e = estimate, f = forecast
SENEGAL
Senegal Population (million inhabitants) GDP (US$ million)
10.2 6,496
Short-term: B
Coface analysis
Medium-term: High risk
STRENGTHS ● The productive apparatus, currently undergoing diversification, and the services sector (transport, telecommunications, tourism) have great development potential. ● Senegal’s geographic position has made it a transit point for regional trade. ● With its political stability and tight economic policy, the country can count on international community support. ● It has benefited from substantial debt reduction under the HIPC programme since reaching the completion point in 2004.
RISK ASSESSMENT Robust economic growth continued in 2005, thanks to a steady farm sector and the strong expansion of the telecommunications and trade sectors. Barring a weather crisis, the economy should continue to grow strongly in 2006, even though oil prices have been affecting household consumption and chemical industry competitiveness. Public sector infrastructure investments, which have been lagging, will have a greater impact on economic activity in 2006. Public sector financial management, facilitated by the good economic conditions, has remained strict, which has made it possible to keep deficits under control and free up the resources needed to maintain infrastructure investment (in education,
WEAKNESSES Poverty (47 per cent of the population), particularly in rural areas, and underemployment have hampered development. ● The economy is still marked by the importance of agriculture (17 per cent of GDP and 60 per cent of the working population). ● Deficient infrastructure, the high cost of energy and overcrowding of the Dakar region have affected investment prospects. ● The country has remained dependent on foreign aid and expatriate remittances to meet its external financing needs. ●
5
health, transport) at satisfactory levels. Although the external account deficits have kept financing needs high, foreign debt reduction should nonetheless ensure that the country’s financial situation remains sustainable. The run-up to legislative elections in 2006 should not jeopardize political stability, the dissension within the party in power notwithstanding. The negotiations initiated under the peace agreement concluded with the separatist Casamance province in January 2005 could put a definitive end to an old conflict that has hampered development of the country’s southern region. Although the Coface payment incident index deteriorated in 2005, that is more a reflection of late payments than actual defaults.
417
SUB-SAHARAN AFRICA MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
4.7 3.0 -4.3 988 1,407 -419 -6.3 77.1 11.8
1.1 2.3 -1.9 1,069 1,609 -540 -8.0 82.6 11.8
6.5 0.0 -3.5 1,260 2,070 -810 -8.6 65.1 11.3
6.0 0.4 -4.4 1,437 2,345 -908 -8.2 49.0 5.6
5.1 2.0 -4.8 1,535 2,415 -880 -7.1 41.3 6.9
5.6 2.1 -3.5 1,621 2,549 -927 -6.9 38.4 7.5
2.8
3.1
2.9
3.1
3.2
3.1
e = estimate, f = forecast
WORLD Senegal
350 300 250 200 150 100 50
05
4
04
ec D
-0
ne Ju
3
04
-0
D ec
ec
ne
D
Ju
02
03
ec -
ne
D
Ju
01
02
ec D
Ju ne
00
01
ec -
ne
D
Ju
9 -9 ec
ne Ju
00
8
99
98
97
-9 ec D
Ju ne
D
ec -9 7
0
Ju ne
418
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 400
ne
Attitude towards foreign investors The National Assembly passed a new law on 11 August 2005 designed to facilitate start-up procedures for first-time investors and modernize investment formalities. The enforcement decree for this piece of legislation, known as Law No 2005-26 of 26 August 2005, is in the pipeline. Three major innovations have been introduced: a one-stop shop for the completion of administrative formalities; a time-limit within which
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D
Means of access The customs union between the member states of the West African Economic and Monetary Union (WAEMU) is simple and not prohibitive. Customs duties vary between 0 and 20 per cent according to product category. There are some token surtaxes (usually around 2.5 per cent), plus 18 per cent VAT. All importers and exporters are required to register with the Foreign Trade Department (Comex) and to obtain a trading and import/export licence. Arms and drugs are banned. The Senegalese government has appointed a Swiss-based inspection firm, Cotecna Inspection, to carry out goods inspections under the Import Verification Programme (PVI). Since 15 October 2001, imports with an FOB value equal to or greater than €4,574 must undergo pre-shipment inspection.
■
government departments must process investment applications; and a duty on government departments to explain their reasons for turning down an application. This law reinforces the new investment act, the concessions act and, last but not least, the community regulatory framework (OHBLA, WAEMU, SYSCOA). With regard to taxation, measures have been taken to cut corporation tax from 33 per cent to 30 per cent for the financial year ended 31 December 2005. On 20 June 2005, the Senegalese president announced to the presidential investment council that corporation tax will be lowered to 25 per cent. The government also proposes to abolish equalization tax from 1 January 2007. However, its efforts are undermined by a judiciary whose rulings are too unpredictable for the liking of foreign investors and by a system of tax audits that concentrates too much on the formal sector. This has the effect of strengthening unfair competition from the informal sector, still exempt from taxation
Ju
CONDITIONS OF ACCESS TO THE MARKET
SENEGAL despite the introduction of a composite tax. Besides, investors continue to encounter numerous obstacles to the implementation of their projects. Foreign exchange regulations There are no restrictions on business-related transfers within the franc area, provided they are
■
handled by approved intermediaries such as banks. It should be noted that transfers can be lengthy. Fund transfers outside the franc area must be accompanied by an invoice, a pro forma, a contract or a documentary letter of credit. Dividend transfers are permitted, but must be supported by proof of entitlement.
OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 55 ■ Public consumption 11 ■ Investment 14
Exports: 28% of GDP
Imports: 40% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
150
600
120
500 400
90
5
300 60
200
30
100
0
0 India
France
Mali
Italy
France
Ivory Coast
Nigeria
Thailand Spain
USA
IMPORTS by products ■ All food items 22% ■ Fuels 36% ■ Chemical products 9% ■ Other manufactured goods 13% ■ Capital goods and transport equipment 17% ■ Miscellaneous 3%
EXPORTS by products ■ All food items 17% ■ Fuels 23% ■ Ores and metals 6% ■ Chemical products 38% ■ Other manufactured goods 9% ■ Miscellaneous 7%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
Senegal 1,620 540 0.458 33.5 50 43.6 22 21.2
Regional average DC average 1,750 500 0.481 36 36 44 11 12
4,300 1,280 0.697 33 43 31 112 28.4
419
SUB-SAHARAN AFRICA
Sierra Leone Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
5.3 793 150
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT The process of consolidating domestic security has firmed up, which will allow the withdrawal in 2006 of the UN troops stationed in the country to maintain order since the civil war ended in 2002. That context will be conducive to continued high growth, buoyed by development of mineral extraction (diamonds, rutile, bauxite), the recovery of farm production and construction, as well as transport and remediation of the energy-and-water-supply infrastructure. However, with the catch-up effect faltering, inflationary pressures remaining severe and authorities continuing to experience difficulties in implementing the structural reforms and anticorruption measures required by donor countries, the recovery’s durability has been in jeopardy.
Due to the country’s internal and external financing needs and unsustainable debt burden, it has been dependent on international aid, which has taken the form of grants and Paris Club debt rescheduling. Although the country has been admitted to the HIPC programme, the completion point initially expected in 2005 has been postponed to mid-2006. Meanwhile, a still difficult social situation with the return of refugees, reintegration of former combatants and very high unemployment as well as a still unstable regional environment (Liberia, Guinea) continue to represent risk factors that could become more severe in the run-up to legislative elections in spring 2006 and presidential elections in 2007.
MAIN ECONOMIC INDICATORS
420
US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
18.2 2.6 -16.5 77 165 -88 -22.0 146 46.0
27.5 -3.7 -16.5 115 255 -140 -12.1 166 21.8
9.3 7.5 -14.5 146 295 -149 -14.1 167 21.5
7.4 14.2 -12.5 172 266 -94 -11.7 160 21.0
6.0 15.0 -14.0 204 313 -109 -13.0 152 16.1
5.0 15.0 -11.8 272 352 -79 -10.2 140 10.7
2.0
2.6
1.6
3.2
2.8
2.9
e = estimate, f = forecast
SOUTH AFRICA
South Africa Population (million inhabitants) GDP (US$ million)
45.8 159,886
Short-term: A3
Coface analysis
Medium-term: Quite low risk
STRENGTHS ● The country’s political, economic and financial influence has made it an indispensable partner in Africa. ● Its potential rests on abundant mineral resources, a diversified processing industry and an efficient services sector. ● Strict macroeconomic policy and limited external financing needs have kept public sector debt at modest levels. ● Its political stability has constituted an asset.
RISK ASSESSMENT The economy seems to be growing at a faster pace, underpinned by robust domestic demand and steady export performance and spurred by the level of raw material prices and the weakening of the South African rand. The outlook for 2006 is still bright despite rising prices, which could prompt the central bank to raise interest rates and thereby reduce the demand for credit. Those good economic conditions have bolstered company solvency. The Coface payment incident index has thus been low, reflecting the decline of bankruptcies (down 9 per cent in 2005). That context, in conjunction with still tight fiscal policy, has fostered an acceleration of investments intended to reduce poverty and modernize infrastructure.
WEAKNESSES A still low investment rate and an insufficiently skilled workforce have been impediments to strong and sustained growth in the medium term. ● The growth rate is still insufficient considering the magnitude of the challenges to be met, such as combating poverty, unemployment and AIDS. ● The social and economic dualism has been a source of tension. ●
5
Although the economic dynamism has spurred imports, external financing needs have remained moderate and debt relatively limited. The capital flow balance moreover, fed by substantial portfolio investment flows, still shows a surplus reflected in a doubling of foreign currency reserves. That will allow the country to cope more effectively with a possible crisis of confidence in financial markets with the level of short-term debt remaining high and, although declining steadily, constituting an element of weakness. Moreover, the country has enjoyed political stability consolidated by the 2004 elections, which has allowed it to cope with domestic tensions, whether social or political in nature. In the run-up to the ANC congress in 2007, intended to elect a successor to President Mbeki, the underlying tensions within the party in power could intensify.
421
SUB-SAHARAN AFRICA MAIN ECONOMIC INDICATORS US$ billions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
2.7 5.7 -0.7 30.9 25.7 5.2 0.1 26.1 15.6
3.6 9.2 -1.1 31.6 26.8 4.8 0.7 29.5 13.6
2.8 5.9 -2.3 38.4 35.0 3.4 -1.5 22.5 13.2
3.7 1.4 -1.9 48.3 48.3 0.0 -3.2 19.9 10.1
4.1 3.6 -1.0 57.8 58.8 -1.0 -3.5 19.7 6.9
4.3 5.1 -2.2 64.1 64.5 -0.4 -3.1 19.7 6.9
1.9
1.9
1.5
2.4
3.1
3.0
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview South Africa’s trade liberalization started in 1990 and has gathered pace after WTO accession in 1994. The country uses the World Customs Organization’s harmonized international nomenclature. Customs duties have been slashed over the last five years. Tariff reforms were completed in early 2000. The Trade, Development and Cooperation Agreement signed between the EU and Africa in 1999 has also played a part in the reduction of customs duties.
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Means of entry Under the free trade agreement signed with the EU in October 1999, about 86 per cent of products imported from the EU will be exempt from customs duty by 2012. South Africa is not a signatory to the WTO Government Procurement Agreement. Tenders have traditionally been overseen at central level by the state tender board and at local level by one of nine provincial tender boards. However, a common service provider is shortly to replace the tender boards with the aim of facilitating the adoption of a uniform policy on government procurement in line with the State Tender Board Act. The Preferential Procurement Policy Framework Act, in force since February 2000, creates a points
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422
system that favours companies whose shareholders or managers are ‘historically underprivileged people’ (black, mixed race, Indian), women and the disabled. South African public procurement legislation actually favours South African or foreign companies that team up with black partners (BEE – Black Economic Empowerment). Where a public tender exceeds US$10 million, foreign companies are required to pay 30 per cent compensation on the total value of imports under the National Industrial Participation Programme. A BEE Charter has been adopted by the financial services industry. It imposes a number obligations, including 25 per cent equity ownership by black interests by 2010. In October 2005, the South African government published a code of good practice for BEE designed to standardize socioeconomic transformation across all sectors of the economy. The legal effect of this code will ensue in 2006, following publication in the official journal. The South African Bureau of Standards (SABS) cooperates with a large number of similar international bodies to harmonize technical standards and regulations. International standards, such as IEC and ISO, as well as a vast number of European standards, are recognized by the Bureau, but require its approval.
SOUTH AFRICA Attitude towards foreign investors Foreign companies are subject to numerous statutory obligations and orders (BEE, affirmative action) that limit their decision-making powers. The administrative environment in which they operate at times lacks transparency and predictability, as in the case of privatizations and public tenders. The invoicing of imported goods is generally done in US dollars (about 80 per cent), but also used are the euro, pound sterling, Japanese yen and the South African rand. Payment instruments available in South Africa are similar to those in Europe and the United States.
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Foreign exchange regulations Exchange controls, which are governed by the 1961 Act and its manifold amendments, have been
■
considerably relaxed in the last few years. The Act’s main function is to distinguish between resident and non-resident transactions as well as between ordinary business and capital transactions. The provisions governing capital transfers for ordinary business transactions have been liberalized. Currency traders believe there are no more de facto exchange controls. Capital transactions – in particular borrowings in local currency and loans from a parent company to a South African subsidiary – remain subject to some restrictions. Measures to remove restrictions on the size of foreign investment came into force in October 2004. For residents, however, the regulations have, if anything, become more restrictive both for capital and ordinary business transactions, although transactions destined for Africa are allowed greater latitude.
PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300
250
WORLD South Africa
200
5
150
100
50
Ju ne
9 D 3 ec Ju 93 ne 9 D 4 ec -9 Ju 4 ne 9 D 5 ec Ju 95 ne 9 D 6 ec -9 Ju 6 ne 9 D 7 ec Ju 97 ne 9 D 8 ec -9 Ju 8 ne 9 D 9 ec Ju 99 ne 0 D 0 ec -0 Ju 0 ne 0 D 1 ec Ju 01 ne 0 D 2 ec Ju 02 ne 0 D 3 ec Ju 03 ne 0 D 4 ec Ju 04 ne 0 D 5 ec -0 5
0
423
SUB-SAHARAN AFRICA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 49 ■ Public consumption 15 ■ Investment 13
Exports: 28% of GDP
Imports: 26% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
5000
6000
4000
5000 4000
3000
3000
2000
2000
1000
1000
0
0 UK
USA
Japan Germany
China
Germany
UK
USA
Japan
China
IMPORTS by products ■ All food items 5% ■ Fuels 12% ■ Chemical products 11% ■ Other manufactured goods 19% ■ Capital goods and transport equipment 39% ■ Miscellaneous 14%
EXPORTS by products ■ All food items 10% ■ Fuels 10% ■ Ores and metals 19% ■ Chemical products 8% ■ Other manufactured goods 29% ■ Capital goods and transport equipment 21% ■ Miscellaneous 4%
STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
424
South Africa 10,130 2,750 0.658 44.7 59 32.1 107 72.6
Regional average DC average 1,750 500 0.481 36 36 44 11 12
4,300 1,280 0.697 33 43 31 112 28.4
SUDAN
Sudan Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
33.5 17,793 531
Short-term: D
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT In the wake of the various accords concluded since 2002, the government and the main rebel movement in the south, the Sudanese People’s Liberation Movement, signed a general peace agreement in January 2005. That initiated a six-year transition period before holding elections, followed by a referendum on southern independence. Late adoption of an interim constitution for that period delayed putting it into effect, with the national unity government thus only formed in September 2005, after the death of the south’s leader, John Garang. Stabilizing southern Sudan will depend on disarming the various militias and implementing an effective institutional environment in the region. Severe military tensions and a grave humanitarian crisis have continued to affect Darfour where, despite
international pressure and threats of sanctions, settlement prospects still seem far off. Also, other lowintensity conflicts have been affecting eastern Sudan. That uncertain political context could undermine some potentially positive economic developments. An ambitious structural reform programme has stabilized the economy. Increased oil production and implementation of large infrastructure projects have allowed the country to post high growth, whose pace should accelerate in 2006. While those developments have been conducive to consolidation of public sector finances, increased capital goods imports has exacerbated external account imbalances. The foreign debt burden has remained heavy and Sudan, which has accumulated arrears (including to multilateral institutions), will not be able to benefit from debt reduction measures until it regularizes its situation.
5
MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
6.4 4.9 -0.9 1,699 2,031 -332 -16.2 162 49.4
6.1 8.3 -0.8 1,949 2,153 -204 -10.0 161 29.2
5.1 7.7 0.7 2,576 2,536 40 -4.7 150 28.7
5.2 8.4 1.6 3,778 3,586 192 -3.8 126 20.8
8.2 10.5 -0.6 5,619 5,122 497 -5.0 98 16.1
13.4 7.0 1.2 6,414 5,748 666 -8.7 74 14.6
0.1
0.8
1.6
3.1
3.5
5.4
e = estimate, f = forecast
425
SUB-SAHARAN AFRICA
Tanzania Population (million inhabitants) GDP (US$ million)
35.9 10,297
Short-term: B
Coface analysis
Medium-term: High risk
STRENGTHS ● Tanzania has great economic potential (tourism, arable land, gas, mineral riches - gold, precious stones) that could attract more foreign investment. ● Political stability has facilitated the implementation of structural reforms. ● In 2001, with the support of the donor community, the country benefited from reduction of public sector foreign debt under the HIPC programme. ● The strengthening of regional integration (EAC, SADC Southern African Development Community) has been an asset for the country's economy.
RISK ASSESSMENT The country has benefited from dynamic economic conditions buoyed by steady farm production, mineral extraction, tourism and the emergence of the manufacturing sector. Barring a major shock, the outlook for 2006 is still bright since the new administration emerging from the December 2005 elections should continue the same policies. Continued efforts on broad structural and institutional reforms have consolidated economic growth, paving the way for gradual diversification of the economy. Except for the difficulties encountered on the semi-autonomous island of
426
WEAKNESSES The economic fabric is still inadequately diversified. ● The economy has suffered from still insufficiently developed infrastructure (transport, energy) and the shaky financial situation of state-owned companies. ● Poverty afflicts over half the population, with Tanzania still one of the countries with the lowest GDP per capita worldwide. ● It continues to depend heavily on international aid. ● The business environment has remained difficult. ● Relations have been unstable with the semiautonomous island of Zanzibar, where economic conditions have been very poor. ●
Zanzibar, the country has benefited from a peaceful environment and remarkable stability. Important sources of weakness have nonetheless persisted. Poor infrastructure and the country’s poverty have limited its attractiveness to investors. A narrow tax base and necessary development spending have undermined public sector accounts. External accounts have been out of balance and, notwithstanding substantial debt reduction under the HIPC initiative, Tanzania has remained very dependent on international aid. Despite the efforts made and some notable progress, governance problems have persisted.
TANZANIA MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)
5.7 5.1 -5.6 816 1,554 -738 -8.9 68 25.0
6.2 4.6 -7.8 1,010 1,660 -650 -7.3 58.1 19.4
5.7 4.4 -9.3 1,175 2,155 -981 -11.0 57.3 10.2
6.7 4.1 -11.4 1,456 2,574 -1,117 -11.2 53.5 11.6
6.9 4.1 -12.6 1,709 3,148 -1,439 -12.4 50.4 10.2
7.2 3.8 -12.7 1,922 3,423 -1,501 -11.7 46.4 9.1
5.9
8.1
7.2
7.2
6.6
6.8
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview Tanzania’s import procedures and tariffs comprise primarily the harmonized customs duties of the three countries of the EAC: Kenya, Tanzania and Uganda. These tariffs vary between 0.10 and 25 per cent and their levels increase with the level of processing. Products, and often equipment, can be imported into free zones exempt from duty, subject to the award of an incentives certificate by the Tanzanian Investment Centre (TIC). Tanzania applies Article VII of the WTO agreement, which calls for pre-shipment goods’ valuation and inspection. The importer’s bank is responsible for submitting the file to the preshipment inspection agency, which forwards it to its agent in the country of origin of the goods. Under this procedure, 1.2 per cent of the FOB value of goods below US$5,000 is payable to the bank as inspection costs. Import duties have decreased and are aligned with the four tariff levels of the EAC’s Common External Tariff. Some priority products are exempt from import duties (unconditioned medicines), some (gold, precious stones and perishable goods) are admitted under ISP arrangements, and others (foodstuffs, live animals, fish, reptiles and arms and munitions) require an import licence. Excise duties apply to imported cigarettes, wines and spirits and so-called luxury items. They vary between 5, 10, 15 and 30 per cent according to the
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product. Ad hoc duties are levied on wines and spirits, beer, sparkling drinks, cigarettes, tobacco and petroleum products. A temporary import tariff, equal to the import tariff marked up by 5 per cent, is also in place to fight fraud. The customs and excise department is responsible for collecting import duties. VAT of 20 per cent is charged on the CIF value of goods marked up by customs and excise duties and all applicable import levies. Imports financed out of the budget of international donors are zero-rated. The Tanzania Revenue Authority has appointed Cotecna Inspection SA to carry out pre-shipment inspections. All imported commercial goods with an FOB value in excess of US$5,000 are subject to such inspections. A second valuation of imported goods and duties payable is carried out by ICS upon entry. There are no exchange controls in Tanzania. The contracting parties decide which means of payment is to be used. Most transactions are carried out in Tanzanian shillings or US dollars, although the euro is slowly gaining ground. ■ Means of entry Tanzania has enjoyed several years of robust growth (over 5.5 per cent annually for the last four years). The Tanzania Investment Act set up a national investment promotion agency, the TIC, which serves as a onestop shop for investors whose foreign direct investment exceeds US$300,000. The TIC issues an incentives certificate to investors who meet these criteria. This entitles them to tax incentives, including
5
427
SUB-SAHARAN AFRICA exemption from import duty on capital goods, VAT and corporation tax during the first five years of business. Legislation governing the free zones set up in 2002 is highly investment-friendly, imposing an export rate of 70 per cent. Restrictions on property ownership and a system of permits for foodstuffs are the main obstacles to market access in Tanzania. Work permits for foreigners are strictly regulated.
■ Attitude towards foreign investors The Tanzanian government encourages foreign investment where this helps to develop exports, facilitate the transfer of technology and create jobs. Growth sectors include mining, telecommunications, energy, agriculture and some privatizable utilities.
OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 62 ■ Public consumption 9 ■ Investment 15
Exports: 18% of GDP
Imports: 27% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
800 700 600 500 400 300 200 100 0
500 400 300 200 100 0 European Japan Union
Kenya
India
European South Union Africa
South Africa
Japan
India
UAE
IMPORTS by products ■ Foodstuffs 13% ■ Fuel 19% ■ Chemical products 12% ■ Other manufactured products 21% ■ Capital goods and transport equipment 32% ■ Miscellaneous 3%
EXPORTS by products ■ Foodstuffs 38% ■ Agricultural raw material 7% ■ Ores and metals 6% ■ Manufactured goods 12% ■ Miscellaneous 37%
STANDARD OF LIVING / PURCHASING POWER Indicators
428
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
Tanzania 620 300 0.418 30.1 35 44.7 4 5.7
Regional average DC average 1,750 500 0.481 36 36 44 11 12
4,300 1,280 0.697 33 43 31 112 28.4
TOGO
Togo Population (million inhabitants) GDP (US$ million) GDP per capita (US$)
4.9 1,759 359
Short-term: C
Coface analysis
Medium-term: Very high risk
RISK ASSESSMENT The political crisis that followed the death of President Eyadema in February 2005 and the disputed election of his son Faure Gnassingbé to the presidency in April marked the past year. Compounded by the difficulties experienced by the cotton and phosphate sectors, those tensions contributed to reducing growth. Moreover, with the country receiving little international aid, government authorities do not have enough leeway to implement ambitious public spending policy. The recovery forecast for 2006 will depend on continuation of the stabilization policy. Appointment
of a broadly representative government in June 2005 and continuation of reconciliation talks with all opposing factions should culminate with the holding of legislative elections by year-end. Effectively holding those elections in satisfactory conditions would pave the way for the release of international aid and for the country’s admission to the HIPC programme. In the near term, however, despite the good performance of cement exports and the revenues from the Port of Lomé – which has benefited from the Ivory Coast crisis – the imbalances in the country’s financial situation will persist, marked by unsustainable debt and recurrent payment arrears.
5
MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
-0.2 3.9 -0.9 352 564 -212 -17.4 108 17.6
4.2 3.1 -0.8 404 597 -193 -14.4 122 13.1
2.7 -0.9 0.8 460 678 -218 -12.9 119 13.6
2.9 1.0 -3.7 495 856 -362 -10.5 105 13.7
0.8 2.0 -0.5 702 939 -237 -11.7 101 7.8
2.9 2.5 -0.4 779 1,044 -265 -12.8 98 6.8
2.1
3.2
2.4
2.6
2.4
2.2
e = estimate, f = forecast
429
SUB-SAHARAN AFRICA
Uganda Population (million inhabitants) GDP (US$ million)
25.3 6,297
Short-term: C
Coface analysis
Medium-term: High risk
STRENGTHS ● By implementing structural reforms, the country obtained international community support and, in 2000, debt reduction under the HIPC programme. ● Uganda has thus been able to attract investors and begin to diversify its economy. ● It has made notable progress in improving public health conditions. ● The country should benefit from regional integration in the East African Community framework.
RISK ASSESSMENT The steadiness of agriculture, construction and services has allowed economic growth to continue at a satisfactory pace. An upturn is expected in 2006, fuelled particularly by the food and telecommunications sectors. However, infrastructure and electricity-supply deficiencies will limit the prospects for more robust growth. The persistence of good economic conditions has nonetheless not resulted in a significant improvement in public sector finances. Moreover, a narrow tax base and continued high rate of security spending will not allow rapid deficit reduction. Large external account imbalances have also persisted. Although increasing, export revenues from coffee, tea and fish have not been enough to
430
WEAKNESSES The economy has remained dependent on agriculture (40 per cent of GDP, 80 per cent of the working population) and international aid. ● The country’s fiscal and external accounts have been subject to structural deficits. ● Deficient transport and energy-supply infrastructure, and a difficult business environment have limited this landlocked country’s attractiveness for investors and reduced its tourism potential. ● Persistent security problems in the north have hampered the country’s development. ●
cover import needs for durable goods and oil. With foreign debt remaining high, moreover, the country has been relying especially on grants – which have represented 45 per cent of its foreign currency earnings – to meet its financing needs. Political development could jeopardize continuation of that support. Even if the July 2005 referendum confirmed the country’s return to a multiparty system, the campaign for the March 2006 presidential elections has drawn criticism from the international community. A constitutional amendment allowing President Museveni, in office since 1986, to run for a third term in conjunction with the arrest of his main opponent, has marred the regime’s image.
UGANDA MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
5.3 4.5 -8.9 446 973 -527 -14.5 59 7.9
6.8 -2.0 -12.2 472 1,083 -611 -13.9 66 6.5
4.5 5.7 -10.8 508 1,131 -623 -14.0 68 8.2
5.8 5.0 -11.1 647 1,321 -674 -12.0 68 6.9
5.5 9.7 -9.7 791 1,608 -817 -12.7 57 8.8
6.2 7.0 -9.2 830 1,804 -974 -12.8 57 7.4
5.5
5.9
6.4
6.6
6.7
6.5
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview The introduction in January 2005 of a customs union between the member countries of the East African Community (EAC) has resulted in tariffs being harmonized around three rates – 0, 7 and 15 per cent – with zero-rated access for production machinery and essential goods. Some 426 products imported by Uganda from Kenya are charged temporary duty at an initial rate of 10 per cent lowered by two points annually over five years. COMESA member countries are granted a preferential tariff also based on three rates: 0, 4 and 6 per cent. Customs declarations must be supported by an invoice, a certificate of origin and an import certificate valid for six months on a renewable basis and issued within 24 hours by the Ministry of Commerce and Industry. Where applicable, a health certificate for live animals, a health certificate and import licence for plants (fresh fruits, vegetables and seeds) and a disinfection certificate for second-hand clothes, bedding and similar articles intended for sale must also be produced. Customs clearance takes about a week. All duties are ad valorem and calculated on the CIF value of goods carried by road, and on the insured value of goods shipped by air. In addition to customs duties and a 4 per cent levy calculated on the CIF value (warehousing duty), all imports are
■
charged 0.8 per cent import duty on the FOB value (in respect of inspection fees), 2 per cent import levy on the CIF value (Import Licence Commission) and, where applicable, 17 per cent VAT and excise duties. Uganda does not apply minimum import prices or quotas. Several import prohibitions and restrictions are applied on grounds of health, safety etc. Uganda applies Most Favoured Nation (MFN) treatment to all its trade transactions. Attitude towards foreign investors FDI in Uganda is governed by the Investment Act 1991, which is restrictive on paper but liberal in its application. The Uganda Investment Authority (UIA) is responsible for processing investment proposals and offering assistance and advice to investors. In a pragmatic move, the government has given it wide powers of initiative to reduce discrimination between foreigners and nationals, pending the introduction of revised, less restrictive legislation. To obtain a licence, foreign investors must submit to the UIA a business plan along with a detailed financial statement of their company’s activities. The UIA is not overly strict in this matter and licences are liberally awarded for a minimum period of five years if the investment complies with the act. The UIA is required to draw up a report on each investment application within 30 days and reach its decision within the next 14 days.
5
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431
SUB-SAHARAN AFRICA The Investment Act does not, however, guarantee foreign investors equal treatment with local ones. Foreigners face a number of obstacles in the form of obligations not applicable to domestic investors, including a minimum investment of US$100,000, staff training, use of local suppliers, respect for the environment, technology transfer etc. No sector of the economy is closed to foreign investment. Foreign investors are protected from forced sales. Where a company is subject to an expropriation order, it is entitled to receive compensation based on the real value of its business within 12 months of the date of expropriation. Property laws continue to pose problems for investors seeking land on which to locate their
432
business. In these circumstances, it is advisable to turn to specialist agencies, law firms or the UIA, all of whom offer land owned by established landlords and carry out identity checks on landlords. The shortcomings of the judicial system constitute an obstacle to investment. Lack of professionalism, corruption and files getting lost mean that it can take years to get a judgment or conclude an action. However, a combination of assistance and pressure from lenders has already yielded tangible results, such as the setting up of a ‘Tax Appeal Tribunal’. France and Uganda signed a reciprocal investment protection and promotion agreement in 2004.
UGANDA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 62 ■ Public consumption 12 ■ Investment 17
Exports: 12% of GDP
Imports: 26% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
80 70 60 50 40 30 20 10 0
400 350 300 250 200 150 100 50 0 Kenya Switzerland Netherlands
UK
Kenya
South Africa
India
South Africa
Japan
UK
IMPORTS by products ■ All food items 16% ■ Fuels 14% ■ Chemical products 13% ■ Other manufactured goods 29% ■ Capital goods and transport equipment 25% ■ Miscellaneous 3%
EXPORTS by products ■ All food items 63% ■ Agricultural raw materials 22% ■ Manufactured goods 9% ■ Miscellaneous 6%
5
STANDARD OF LIVING / PURCHASING POWER Indicators
Uganda
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
1,430 250 0.508 34.9 15 49.8 2 4
Regional average DC average 1,750 500 0.481 36 36 44 11 12
4,300 1,280 0.697 33 43 31 112 28.4
433
SUB-SAHARAN AFRICA
Zambia Population (million inhabitants) GDP (US$ million)
10.4 4,335
Short-term: C
Coface analysis
Medium-term: Very high risk
STRENGTHS ● A world-leading exporter of copper, Zambia also boasts substantial farm and tourist potential. ● The country enjoys internal and external political stability conducive to its development. ● By virtue of those assets, it has attracted investor interest and earned the backing of multilateral financial institutions. ● In April 2005, Zambia reached the completion point in the HIPC programme, paving the way for a sharp reduction of its foreign debt.
RISK ASSESSMENT In 2005 – with the pattern carrying over to 2006 – surging copper prices buoyed economic growth and spurred investment and mineral production. The economy has also benefited from the results of tourism and the impact of productivity improvement measures on farm production. However, rising food and oil prices have kept inflation at high levels. Those economic conditions along with adoption of tight fiscal policy have facilitated the consolidation of public sector finances, which have nonetheless been shaky and could be further jeopardized in the
434
WEAKNESSES The country’s landlocked situation and deficient infrastructure have impeded its development. ● With the economy lacking diversification, growth has been very sensitive to weather conditions and raw material prices. ● Poverty and AIDS, with the pandemic affecting 16 per cent of the adult population, have severely compromised development prospects. ● Covering internal and external financing needs has remained dependent on international aid. ● The business environment has suffered from major shortcomings. ●
run-up to the general elections scheduled for December 2006. That would undermine the government’s credibility with multilateral institutions whose backing remains essential. Zambia will effectively continue to need international aid to meet financing needs that are still large despite the improvement in external accounts resulting from the growth of exports and reduction of debt service. The permanence of the support will also depend on continued implementation of structural reforms, which could be hampered by an increase in social tensions already heightened by rising prices and fiscal austerity.
ZAMBIA MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
4.9 21.7 -13.0 884 1,253 -369 -20.8 200 13.8
3.3 22.2 -13.4 916 1,204 -288 -17.3 172 11.6
5.1 21.5 -13.0 1,052 1,393 -341 -16.2 162 15.5
5.4 18.0 -8.4 1,588 1,727 -139 -11.8 130 25.3
5.0 19.0 -7.7 1,947 1,934 13 -10.2 66 5.8
6.0 18.5 -8.9 1,994 1,973 21 -8.4 64 3.9
0.8
2.0
1.2
1.2
1.5
1.8
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET ■ Means of entry Goods may be freely exchanged and imports of certain goods in the agricultural and mining sectors are exempt from duty. ATA carnets are accepted. Customs clearance is usually done within 72 hours of the products being presented and import consolidation is allowed. For an import to qualify for preferential treatment, a COMESA or SADC certificate of origin is required. Excise duties vary between 5 and 125 per cent of the product’s value and customs duties between 0 and 25 per cent. VAT is levied at the rate of 17.5 per cent. There is also a duty drawback system. All means of payment are used and accepted. However, documentary credit is recommended. ■ Attitude towards foreign investors The Investment Act 1993, amended in 1998, guarantees freedom of investment in Zambia. Certain sectors – tourism, mining, air and road
transport and finance – require an additional operating licence. There are no restrictions concerning foreign shareholdings on the statute book and the Lusaka stock exchange is open to foreign investors. Corporation tax varies between 15 and 45 per cent according to activity. Profits are fully repatriable. Free zones (EPZs) introduced in 2003 offer foreign investors such tax benefits as exemption from corporation tax and excise duties. The country has reciprocal investment protection and double taxation agreements with several countries, including France. Disputes between a foreign investor and a local party are subject to local or international arbitration (ICSID, UNCITRAL). Zambian law makes it difficult to employ expatriates and 50 per cent of managers must be Zambian.
5
■ Foreign exchange regulations There are no exchange controls. A foreign resident may open a foreign currency account with a local bank. No cover against currency risk is available, however, and financial transaction costs remain high.
435
SUB-SAHARAN AFRICA OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 52 ■ Public consumption 15 ■ Investment 20
Exports: 21% of GDP
Imports: 28% of GDP
MAIN DESTINATIONS OF EXPORTS
MAIN ORIGINS OF IMPORTS
Mn USD
Mn USD
300
800 700 600 500 400 300 200 100 0
250 200 150 100 50 0 UK
South Africa
South Zimbabwe Africa
Tanzania Switzerland Demogratic Republic of Congo
UK
UAE
China
IMPORTS by products ■ All food items 14% ■ Fuels 7% ■ Chemical products 15% ■ Other manufactured goods 29% ■ Capital goods and transport equipment 31% ■ Miscellaneous 4%
EXPORTS by products ■ All food items 9% ■ Ores and metals 64% ■ Other manufactured goods 13% ■ Capital goods and transport equipment 5% ■ Miscellaneous 9%
STANDARD OF LIVING / PURCHASING POWER
436
Indicators
Zambia
GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
850 380 0.394 41 40 46.8 8 8.5
Regional average DC average 1,750 500 0.481 36 36 44 11 12
4,300 1,280 0.697 33 43 31 112 28.4
ZIMBABWE
Zimbabwe Population (million inhabitants) GDP (US$ million)
13.1 17,750
Short-term: D
Coface analysis
Medium-term: Very high risk
STRENGTHS ● Zimbabwe boasts substantial economic potential that could make it one of Southern Africa’s main locomotives. ● Besides mineral and agricultural resources, the country has benefited from its diversified industrial fabric. ● The quality of the services sector’s foundations (financial, transport, tourism) will facilitate an economic recovery.
RISK ASSESSMENT The decline of farm production due to the sector’s disorganization and the drought has contributed to keeping the country mired in recession. A lack of foreign currency has limited capital goods and energy product imports, which has hampered all economic sectors. Moreover, sluggish household demand and very limited investment does not augur recovery in the near future, with the outlook for 2006 remaining gloomy. A consumer goods shortage and fiscal deficit financing have contributed to sustaining very high inflation. Lacking adequate export earnings,
WEAKNESSES Since the 2000 agrarian reform, the country has been mired in a profound economic and financial crisis. ● That situation has further heightened political and social tensions. ● With Zimbabwe in default on payments to international financial institutions, the international community has ostracized the country. ● The health situation has deteriorated sharply with generalized malnutrition and the ravages of the AIDS pandemic affecting the human potential. ●
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despite recovery of gold and platinum sales, foreign currency reserves have remained very low with the country still unable to meet its international commitments. Reforms initiated by the central bank governor in 2004 to reduce inflation and adequately replenish foreign currency reserves fell through at the end of the electoral period. The legislative elections of 2005 gave the regime a large majority and increased its power, especially with the main opposition party already weakened by the repression to which it has been subject, and currently in a situation that could cause it to split.
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SUB-SAHARAN AFRICA MAIN ECONOMIC INDICATORS US$ millions
2001
2002
2003
2004
2005(e)
2006(f )
Economic growth (%) Inflation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)
-2.7 73 -7.5 2,114 1,791 323 -1.0 45.3 31.4
-4.4 133 -2.8 1,802 1,821 -19 -2.6 53 35.1
-10.4 365 -0.4 1,670 1,778 -108 -3.1 64.4 35.4
-4.2 350 -7.1 1,680 1,989 -309 -7.3 70.7 35.3
-7.1 255 -16.1 1,694 2,053 -359 -6.8 78.6 30.9
-4.2 330 -9.4 1,727 1,998 -271 -12.8 83.3 26.0
0.1
0.1
0.1
0.1
0.1
0.1
e = estimate, f = forecast
CONDITIONS OF ACCESS TO THE MARKET Market overview The economic and financial crisis that has beset Zimbabwe for the last six years makes it a risky country for foreign investors.
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Means of entry Goods can be freely exchanged, although a certificate of origin is required for imports. Customs duties vary between 0 and 138 per cent according to the type of import, except for goods from COMESA, which are exempt from duties on the basis of reciprocity. From 1 August 2005, VAT on all imports is 17 per cent, up from 15 per cent since the introduction of VAT on 1 January 2004. A surtax of 15 per cent applies to all products charged more than 30 per cent customs duty. All means of payment are used and accepted. However, the irrevocable letter of credit is recommended.
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Attitude towards foreign investors The Investment Act 1989 guarantees protection of foreign investment. In mining, manufacturing and tourism 100 per cent foreign ownership is allowed; for the services sector this is 70 per cent, and 35 per cent in agriculture, armaments and water. Since 1 January 1995, all profits and dividends are repatriable upon payment of taxes (30 per cent).
Money transfers remain a rarity in a country facing a severe shortage of foreign exchange. Companies operating in Zimbabwe are liable to a 20 per cent tax on the dividends earned by their foreign-based subsidiaries. A 3 per cent tax is levied on all companies to support the fight against AIDS. Zimbabwe has a double taxation agreement with France as well as other countries. Foreign enterprises can locate to any of the so-called ‘export processing zones’ that offer a number of incentives, including tax breaks and more flexible wage arrangements. The stock exchange is open to foreign capital, but a listed company must not be more than 40 per cent foreign-held, nor more than 10 per centowned by any single foreign shareholder. Investors with a capital of US$100,000 can obtain a three-year work permit. It is possible to employ foreigners only where equivalent local skills are unavailable. Disputes between a foreign investor and a local party are subject to local or international arbitration.
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Foreign exchange regulations The new currency management and control system applies two rates. One is for the government (ZWD26,000:US$1), payable to the Reserve Bank of Zimbabwe and applicable to 30 per cent of the foreign currency earned from exported products; the other is an interbank (commercial) rate ‘freely fixed’ by the market at ZWD60,000 to the dollar (October 2005).
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ZIMBABWE OPPORTUNITY SCOPE Breakdown of domestic demand (%GDP + imports) ■ Private consumption 59 ■ Public consumption 16 ■ Investment 7
Exports: 24% of GDP
Imports: 22% of GDP
MAIN DESTINATIONS OF EXPORTS Mn USD
MAIN ORIGINS OF IMPORTS Mn USD
200
1000 800
150
600
100 400
50
200 0
0 Zambia
South Africa
China Germany
South Democratic Germany Africa Republic of Congo
Japan
UK Mozambiques
IMPORTS by products ■ All food items 11% ■ Fuels 8% ■ Chemical products 19% ■ Other manufactured goods 23% ■ Capital goods and transport equipment 34% ■ Miscellaneous 5%
EXPORTS by products ■ All food items 25% ■ Agricultural raw materials 11% ■ Ores and metals 19% ■ Other manufactured goods 25% ■ Capital goods and transport equipment 5% ■ Miscellaneous 15%
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STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of telephones per 1000 inhabitants Number of computers per 1000 inhabitants
Zimbabwe 2,180 590 0.505 40.3 37 43.4 26 52.7
Regional average DC average 1,750 500 0.481 36 36 44 11 12
4,300 1,280 0.697 33 43 31 112 28.4
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ACRONYM TABLE AND LEXICON ACRONYM TABLE AND LEXICON ACN: Andean Community of Nations AFTA: ASEAN’s Free Trade Area ASEAN: Association of South East Asian Nations AU: African Union CAFTA: Central American Free Trade Area CEFTA: Central European Free Trade Agreement CEMAC: Economic and Monetary Community of Central Africa CET: common external tariff CIS: Community of Independent States COMESA: Common Market for Eastern and Southern Africa CPI: consumer price index CSID: International Centre for Settlement of Investment Disputes Currency board: system whereby a country pegs its currency to a foreign currency (generally the US dollar or euro) with a currency board supplanting the central bank EAC: East African Community ECOWAS: Economic Community of West African States EDB: Economic and Development Board EMCCA: Economic and Monetary Community of Central Africa EMU: Economic and Monetary Union ESMA: Emirates Authority for Standardization and Metrology EU: European Union FDI: foreign direct investment GAFTA: Greater Arab Free Trade Area GDP: gross domestic product GNP: gross national product HIPC initiative or programme: a joint IMF/World Bank initiative in favour of heavily indebted poor countries, which can permit cancellation of their public external debt once they meet specified conditions and thus reach the HIPC ‘completion point’ IDB: Inter-American Development Bank IFO: Information and Forschung, one of the leading economic research institutes in Germany IMF: International Monetary Fund INPI: Institut National de la Proprieté Industrielle (National Institute for Industrial Property)
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ACRONYM TABLE AND LEXICON MAS: Monetary Authority of Singapore MIGA: Multilateral Investment Guarantee Agency MINUSTAH: United Nations Stabilization Mission in Haiti NAFTA: North American Free Trade Area NATO: North Atlantic Treaty Organization NICT: new information and communication technologies NAFTA: North American Free Trade Agreement OHBLA: Organization for the Harmonization of Business Law in Africa OECD: Organization for Economic Cooperation and Development OPEC: Organization of Petroleum Exporting Countries Paris Club: an informal group of official creditors devoted to finding sustainable solutions to payment difficulties experienced by debtor nations Payment incidents index: payment default indices reflect the payment-incident trend on commercial transactions payable in the short term worldwide across a broad range of economic sectors. The monitoring of payment incidents is based on a composite of several sets of company-payment–capacity indicators available in Coface databases: those derived directly from its credit insurance, receivables management and company information activities, and those obtained from partners. Payment incidents are expressed as indices based on the average of incidents recorded over the world between 1995 and 2000. The resulting curves thus permit comparing a country’s or sector’s payment risk level with the world average as well as monitoring the trend of those risks
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PPP: purchasing power parity R&D: research and development RLDC: relatively less developed country SACU: Southern African Customs Union SADC: Southern African Development Community SEC: Security and Exchange Commission SWIFT: Society for Worldwide Interbank Financial Telecommunication, which runs a worldwide network whereby messages concerning financial transactions can be exchanged between banks and other financial institutions in 194 countries SYSCOA: Système Comptable Ouest-African (West African Accounting System) UEOMA/WAEMU: Union Economique et Monétaire Ouest Africaine/West African Economic and Monetary Union UNCITRAL: United Nations Commission on International Trade Law UNCTAD: United Nations Conference on Trade and Development WTO: World Trade Organization
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